The Producer Price Index (PPI) is a monthly economic measurement tool used by economists, bankers, accountants, financial analysts, and senior corporate executes to forecast future economic behavior. It measures the average change in prices that domestic producers of goods receive for their products in a given country. It, along with the Consumer Price Index (CPI) helps to define the cost of living. The cost of
living is used to forecast poverty rates and affects public policies. Publix policies affect the way that we live.
The PPI data is collected and reported by the US Bureau of Labor Statistics (BLS).
It is gathered from a statistical sampling of around 25,000 various producers, including producers of services, from around the country each month. Usually, volatile producers e.g. in oil and gas industries are excluded so as to make the index more stable and reliable. The survey businesses report the prices that they are currently charging for their products/services. Price changes are incorporated into the overall index according to industry. The industries are assigned different weights in the index that roughly correspond to the relative value of products in
that industry.
The PPI is used by the government in calculating the Gross Domestic Product (GDP). Because price inflation generally acts to increase the dollar value of economic transactions, looking only at dollar values would usually overstate the amount of growth in the economy. The government uses the PPI as a price deflator
to separate the effects of price inflation from the effects of real economic growth.
The PPI is used by businesses to forecast what they will charge for future products and services on long-term contracts. Because the transactions tracked by the producer price index occur earlier in the product chain, many economists look at producer prices as a leading indicator of consumer prices.
The PPI can be used by you via your conclusion that a rise in the PPI, will translate into a rise in the CPI BEFORE the CPI report gets released. For example, if the prices that a car manufacturer like General Motors (NYSE: GM) must pay for the steel, fabric, and plastic used to make cars increase, then car prices may need to increase in order to keep the company´s profit margin stable. Whether consumer
prices follow producer prices depends on the ability of retailers to pass on additional costs to consumers; if consumer demand for a product were to decrease substantially if retail prices were to rise, then a retailer may absorb higher costs rather than increasing prices to compensate.
There are several important differences in the way the PPI is calculated versus the way the consumer price index is determined. First, although the PPI has integrated some services into the index, services do not have as much weight in the PPI as they do in the CPI. Second, the PPI does not measure prices of imported products, while the CPI includes prices of both foreign and domestic goods and services in calculating the index.
The PPI can be used as an early warning system for the possibility of price inflation. It helps give you, as an astute investor or business owner, information about the prices of goods and services early in the chain of production. You can start to forecast business economic events BEFORE they happen. As we have said
before: A great investor is one who can see what no one else can see BEFORE THEY SEE IT!
FYI: The next PPI will be released April 11, 2024. By following the trend of the past three PPI reports, then comparing it with the previous three reports of the same time last year, you can increase your accuracy at forecasting i.e. predicting future economic activity.
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