Financial Options

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Official Name(s): Producer Price Index (United States)
Common Name/Acronyms: PPI
Source of the statistic: Bureau of Labor Statistics, United States Department of Labor
Frequency/Usual Dates of Release: Monthly. Usually released on Tuesday during the second full week of the month.
Leading, Lagging or Coincident: PPI is considered a leading indicator of price inflation.

What does it measure? Wholesale price inflation. From 1902 to 1978, the PPI was called the «Wholesale Price Index.» The BLS puts it this way, PPI «measures the average change over time in the selling prices received by domestic producers for their output.The prices included in the PPI are from the first commercial transaction for many products and some services. » In other words, it measures the increase or decrease in prices of goods and services at the most basic level of production. The PPI measures only prices from US products, not imports or exports.

What do the numbers mean? What can I compare them to? The PPI is a weighted average of the prices of a basket of goods and services. The value given to each of the goods and services is weighted to reflect the importance of that particular item, so a very commonly used finished material (such as steel or rubber) would get a much greater weight than something which is rarely used (such as ).

The base for PPI is the year 1982 which had a value of 100. A number above 100 indicates average prices above 1982 levels. A number below 100 (so unlikely as to be nearly unthinkable) would indicate average prices below 1982 levels. Of course, comparisons to 1982 aren't especially useful in 2006. What is more useful is to compare the current index numbers to other recent months.

How is this indicator produced? The Bureau of Labor Statistics surveys a large number of firms regarding the prices of specific products, selected by BLS economists who actually visit the firms initially. The firms are selected based on their employment size and are selected randomly from companies in the Unemployment Insurance System.

What is considered “good” and “bad”? Prevailing economic theory, which guides most policymakers and certainly influences many investors, holds that inflation is a normal part of the growth portion of the business cycle. Deflation or more commonly in recent years reduced inflation («disinflation») is associated with recessions or slowing growth. Small, relatively stable monthly increases in the PPI would tend to indicate what many policymakers refer to as «sustainable» growth. When the increases get larger, we're more likely to see actions intended to rein in inflation, such as interest rate increases by the Federal Reserve.

How might a “good” measurement affect various investments? Stable, moderate increases in PPI should be good for normal cyclical stocks and related investments as they indicate the kind of growth that will improve corporate profits without drawing down those dreaded interest rate increases. Sharp increases are a double whammy for stocks as they reflect increased costs for the corporations and an increased risk of interest rate increases. Drops may be read as reflecting an economic slowdown that could hurt corporate profits, though they may also be seen as helping companies with costs including the cost of borrowing. Big increases in PPI could be a forerunner of big increases in CPI. Once inflation sets in, it's a bit late to change investing strategies, but it's certainly worth looking at inflation hedging.

Comments from the source:

The Producer Price Index is a family of indexes that measures the average change over time in the selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI), that measure price change from the purchaser's perspective. Sellers' and purchasers' prices may differ due to government subsidies, sales and excise taxes, and distribution costs.

Over 10,000 PPIs for individual products and groups of products are released each month. PPIs are available for the products of virtually every industry in the mining and manufacturing sectors of the U.S. economy. New PPIs are gradually being introduced for the products of industries in the transportation, utilities, trade, finance, and services sectors of the economy.

General comments: There are actually three indexes: crude, intermediate, and finished. As with the Consumer Price Index, which measures retail inflation, many people tend to look at the so-called «core rate» which excludes food and energy from the calculations. Because food and energy prices tend to be very volatile, they can cause large increases and decreases from month to month which have very little to do with the general state of the economy, though sustained increases in prices can certainly act as a drag on the rest of the economy.

Where can I learn more about this economic statistic?

Bureau of Labor Statistics PPI FAQ

Keys to Understanding the Financial News (Barron\'s Business Keys)

Inflation Targeting : Lessons from the International Experience

The Handbook of Inflation Hedging Investments