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Producer price index (PPI)

Producer price index (PPI)

Producer Price Index (PPI) determines price-level changes for the basket of goods, produced in the industry. This index consists of two parts: entry prices (semi-products, components, etc.) and output prices (finished products). The output price includes the value of labor and gives an idea about inflation, connected with change in value of labor. When calculating the index, the prices for imported goods and services are not taken into account. When producers face input inflation, the increases in their production costs are passed on to consumers. Therefore, the PPI serves as a leading indicator for the CPI. This indicator has a considerable effect on the market. Amid the expectations for the rising of the basic interest rates, growth in the value of the indicator leads to the strengthening of the US dollar.

Producer Price Index (PPI) rates the prices for goods at the wholesale level. There are three large sub-categories of the PPI: initial, intermediate and final. The market very closely follows the index of final goods, because this index reflects the prices for the goods, which are ready for sale to the end user. The prices for goods at the initial and intermediate stages of industry very often give the display of the upcoming inflationary (deflationary) pressure. However, the closer the initial goods are, the stronger these prices correspond to the commodity prices, which are already available in the trading indices, such as the CRB (Commodity Research Bureau).

At all the stages of industry, the market’s attention is drawn to the basic index that excludes food and energy resources. The corresponding index is called the Core PPI. It is published together with the main index. The food and energy prices are intended to be volatile and cover the tendencies of the basic level of inflation. Even though the reaction of the market is determined by the monthly changes, the annual changes are also noted by analysts. The index is not revised on the monthly basis. However, the annual revisions with the seasonal adjustments may make small improvements in the succeeding publications.

The PPI is calculated according to the same principle as the Consumer price index (CPI).

The aggregate cost of the basic basket for the current period of time is divided by the value of the previous period. After that, one point is taken from the received value. The result is represented in the percentages. Apart from that, the value may be positive, as well as negative. Compared to the CPI, the PPI falls significantly from time to time, especially when the published values are negative. The PPI and the national currency rate have a direct correlation – growth in the index in most cases leads to an increase in the national currency rate and vice versa.

The advance of the PPI leads to cost inflation. According to analysts, it has a greater influence on the economy than demand inflation. The PPI is considered to be the leading indicator in comparison with the CPI, because consumer prices change with a delay in relation to producer prices. The PPI is published on the 11th day of every month at 4:30 pm GMT+3. The index is published for the previous month.

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