The Producer Price Index (PPI) is a weighted index of prices measured at the wholesale, or producer level. The PPI shows trends within the wholesale, manufacturing industries and commodities markets. All of the physical goods-producing industries that make up the economy are included, but imports are not.
The PPI measures the average changes over time in the selling prices received by domestic producers. The PPI differs from the Consumer Price Index (CPI) in terms of the composition of the goods and services covered, the types of prices collected and the extent of coverage of the services sector.
The PPI measures sales at all levels of output for producers. This includes sales of non-finished goods used along the chain of production and output. The CPI measures purchases of finished goods and services by urban households.
There are three stages of the PPI
- Commodity Index tracks the average price change from the prior month for coal, crude oil and other commodities.
- Stage of processing index measures the prices paid for goods that are sold to manufacturers who will add value and use the goods to produce finished products.
- Industry stage measures the final stage of manufacturing output.
Why the Producer Price Index is important?
The PPI can serve as a leading indicator of ultimate price changes at the consumer level, and of inflation if the trend in the PPI is higher. Low inflation is good for stimulating consumer spending, corporate profits and ultimately the stock market. Increased inflation can be a sign of an overheating economy and potentially higher interest rates.
The PPI can provide analysts, business executives and investors with information about the trends in prices at various stages of the production process. This is helpful for businesses in making capital investment decisions, for analysts in tracking economic trends and for investors looking for clues as to future inflation.
Strengths of the Producer Price Index
- Most accurate indicator of future CPI
- Long “operating history” of data series
- Good breakdowns for investors in the companies surveyed (mining, commodity info, some services sectors)
- Can move the markets positively
- Data is presented with and without seasonal adjustment
Weaknesses of the Producer Price Index
- Volatile elements, such as energy and food, can skew the data.
- Not all industries in the economy are covered.