Understanding the PPI

PPI, or Producer Price Index, measures the average change over time in the selling prices received by domestic producers for their output.

It calculates the price changes in raw materials, semi-finished, and finished products.

PPI is widely used to measure the rate of inflation in an economy. Generally speaking, a higher PPI indicates higher inflation, while a falling PPI indicates lower inflation or deflation.

Another well-known indicator of inflation is the Consumer Price Index (CPI), which measures inflation from the consumers' perspective, reflecting the average change over time in the prices urban consumers pay for goods and services.

While PPI measures inflation from the producers' perspective, reflecting the average selling price they receive for their output over time.

Since it measures price changes before consumers purchase final goods and services, PPI is considered a leading economic indicator that many analysts consider to predict inflation before the CPI and indicates the future direction of inflation or deflation.

As we know, the Federal Reserve always strikes a balance between inflation and the jobs market.

As a general rule, the Federal Open Market Committee (FOMC) implements monetary policy to help keep inflation at around 2% over the medium term.

If the PPI or CPI numbers remain above this level, the Fed can deem it threatening the economy. This could lead the FOMC to increase interest rates to rein in rising prices.

On the other hand, an extended period of low or negative inflation means the central bank would consider actions stimulating the economy, such as cutting interest rates or embarking on Quantitative Easing (QE).

As a result, when the PPI posts larger-than-expected gains, people usually see a strong dollar, bond prices fall, and the equity market falls.

Otherwise, when the PPI is lower-than-expected gains, people usually see a weak dollar, bond prices rise, and the equity market rises.

PPI is published monthly by the US Bureau of Labor Statistics (BLS) at 8:30 AM ET, according to the schedule (usually around the 12th to 16th). It is worth noting that the release of the PPI each month is not the last word. Both monthly and annual reports may be revised as more complete data becomes available.

Moreover, about 10,000 PPIs for products and groups of products are released monthly. PPI data are separated into three main classification areas, and the most widely followed one is the core PPI.

The core PPI does not include food and energy items because they are historically volatile and can potentially give a misleading deflationary signal.