With the right tools at your disposal, you can make better decisions for the success of your small business. The Raw Materials Price Index (RMPI) is one such tool that helps explain the relative change in the price of raw materials purchased by Canadian manufacturers. Essentially, the RMPI looks at the prices of several manufacturing expenses, including raw materials, transportation costs, taxes, and import duties. Then, it compares the price of these goods from the previous year to create a ratio or index.
Why Does the RMPI Matter?
Analysts use this index as an early warning indicator for inflation. Rising prices in manufacturing costs eventually correspond to rising consumer prices. As a business owner involved in manufacturing, you can use the index to assess when commodities prices are on the rise, determine when you need to increase your manufacturing budget, and track relative changes in your business expenses compared to national shifts in the prices of raw materials.
RMPI can affect transportation as the price of oil and fuel rises. The index can also cause fluctuations on foreign exchange markets, thereby altering the prices of imported and exported goods depending on how favourably the Canadian dollar matches up with other currencies.
Example of the RMPI
Imagine your company imports silk from China to make neckties. Last year, you paid $10,000 for 1 tonne of silk, including the import duties to get those materials into Canada. A year later, you paid $12,000 for the same tonne of silk. The RMPI would therefore go up for your business. As such, you may have to raise the prices of your silk neckties because the price of your raw materials went up.