What is a Producer Price Index (PPI)?
The Producer Price Index (PPI) is used to measure the change over time of the average price of goods produced domestically.
How Does a Producer Price Index (PPI) Work?
The producer price index consists of a weighted index of goods prices at wholesale. PPI is divided into three levels. The first is the PPI commodity Index, which shows the average price change over a certain time period (usually a month) for commodities like crude oil and coal.
The second level is the PPI stage of processing (SOP), which consists of goods that are in a manufacture stage between raw and finished, and will be sold to other manufacturers to create the finished goods. Examples include cotton, gasoline and steel.
The third and final PPI level consists of finished goods. That is, they have undergone their final stage of manufacturing and will be sold to consumers. The finished goods level is the source of the core PPI.
Core PPI is the primary economic indicator. [InvestingAnswers Feature: Leading Economic Indicators Cheat Sheet] Core PPI is a price index for finished goods except those in the food and energy sectors because of their high price volatility.
Why Does a Producer Price Index (PPI) Matter?
PPI of finished goods is a direct indicator of the near-term level of the Consumer Price Index (CPI). This is because changes in prices at the retail level (finished goods) are directly transferred to consumers at the point of sale. Since the CPI is the primary indicator used to measure inflation in an economy, the PPI is a preview of changes in the rate of inflation.