The Producer Price Index (PPI) is an economic indicator that measures the change in the selling prices, or wholesale prices, received by domestic producers for their output.

It helps to gauge inflationary pressures in the economy and provides insight into the health of various industries.

The PPI is not as widely used as the CPI, but it is still considered to be a good indicator of inflation.

This indicator reflects the change in manufacturers’ cost of inputs (such as raw materials).

Formerly known as the “Wholesale Price Index“, the PPI is a basket of various indexes covering a wide range of areas affecting domestic producers.

Each month approximately 100,000 prices are collected from 30,000 production and manufacturing firms.

It is not as strong as the CPI in detecting inflation, but because it includes goods being produced it is often a forecast of future CPI releases.

The report is released in the second week of every month and includes data on the previous month.

For example, June’s report includes data on May.

What is PPI?

The report is generated through a mail survey of several randomly selected retailers (with proportional preference given to size.)

Where possible, actual transaction prices for the products included are used in generating the report.

The report expresses prices through a percentage index of a baseline level of production (rather than through a dollar amount).

The report also expresses changes in the index from month to month and the index change from the previous year.

The PPI is likely to be different from the CPI for any given time period because producers sell both consumer goods and intermediate goods to other businesses at different stages.

Even for finished goods, the prices that the producers get and the prices that the buyers pay are often different. This is because the price that the buyers pay includes taxes, subsidies, and distribution costs.

The index is calculated by comparing the current selling prices of a representative basket of goods and services to their prices in a base period.

There are three main types of PPI:

  1. Commodity Index: It measures price changes at the commodity level, such as raw materials and intermediate goods.
  2. Industry Index: It tracks price changes within specific industries, allowing for detailed analysis of sectoral trends.
  3. Stage of Processing Index: It captures price movements at different stages of production, providing insight into inflationary pressures at various points in the supply chain.

The industry and commodity-based indexes are extremely extensive, allowing a high level of specificity when looking for data on a particular asset.

Why is PPI important?

The PPI is important for several reasons:

  1. Inflation Indicator: PPI is a leading indicator of consumer price inflation. A rise in producer prices often translates to higher costs for consumers, while a drop signals lower inflationary pressures.
  2. Business Planning: Businesses use PPI data to adjust their pricing strategies, manage costs, and forecast future demand for their goods and services.
  3. Economic Analysis: Policymakers and investors analyze PPI trends to assess the overall health of the economy, identify potential inflationary risks, and make informed decisions regarding monetary policy and investment strategies.

Traders mainly use the PPI as an indicator of price inflation over time. Although the similarly-functioning Consumer Price Index (CPI) is considered to be a more useful measure of present inflation, the PPI’s inclusion of goods in production makes it a potential leading indicator of future price inflation in certain industries.

One key drawback of the PPI is that it excludes all data on imported goods, making it difficult to detect the influence of one country’s market on another with respect to currency prices.

Who publishes the PPI?

In the United States, the PPI is published by the Bureau of Labor Statistics (BLS), which is part of the Department of Labor.

In other countries, similar agencies or statistical organizations are responsible for compiling and releasing PPI data.

When is the PPI released?

PPI data is typically released monthly, with some countries also publishing quarterly or annual reports.

In the United States, the BLS releases the PPI report every month, usually around the middle of the following month.

The data is available on the BLS website and through various financial news outlets and data providers.

How to trade the PPI

When the PPI report is released, it’s essential to consider the current market conditions and the broader economic context.

It is an important indicator of inflation, as it reflects changes in production costs that may eventually be passed on to consumers.

Here are some factors to consider when interpreting the PPI report:

  1. Market expectations: Before the report’s release, analysts and economists usually provide their forecasts. If the actual PPI numbers deviate significantly from market expectations, it could trigger market reactions, such as fluctuations in stock prices, bond yields, and currency exchange rates.
  2. Inflation trends: Compare the current PPI data with previous months or years to understand the prevailing inflation trends at the producer level. If the report shows a consistent rise in the PPI, it could indicate growing inflationary pressures at the production stage, which might eventually be passed on to consumers.
  3. Core PPI: The core PPI excludes volatile items like food and energy prices, focusing instead on the prices of other goods and services. The core PPI is considered a more stable indicator of underlying inflation trends. Compare the core PPI with the overall PPI to identify whether specific factors, such as changes in commodity prices, are driving the headline inflation rate.
  4. Relation to CPI: Analyze the PPI report in conjunction with the Consumer Price Index (CPI). If both PPI and CPI are showing similar trends, it could indicate that inflationary pressures at the producer level are being passed on to consumers.
  5. Economic factors: Examine the PPI report in the context of other economic indicators and factors, such as unemployment, GDP growth, and fiscal policies. This will help you better understand the drivers of inflation at the producer level and gauge the overall health of the economy.
  6. Market reaction: Observe how financial markets react to the PPI report, including movements in stock prices, bond yields, and currency exchange rates. This will give you insight into how investors are interpreting the data and its potential impact on future monetary policy decisions.

In summary, interpreting the U.S. PPI report involves considering market expectations, inflation trends, core PPI, its relation to the CPI, and the broader economic context.