We mentioned in the previous section that we’d be discussing inflation, and it’s time to look at one of the two major indicators of inflation that the markets tend to watch at all times.

WHAT IS THE PRODUCER PRICE INDEX (PPI)?

The producer price index, or PPI for short, is the measure of changes in prices charged by wholesalers to their clients such as retailers who then add their own profit margin to the producer’s price and pass the product to the consumer. Since the producer is at the beginning of the supply chain, under normal economic conditions where there’s healthy consumer demand and the economy is growing, the PPI can serve as an early-warning system for predicting price changes at the retailer end of the chain. The producer price index is different from the consumer price index (CPI) in that it also includes commodities and intermediate materials (such as a car engine or its components, for which the consumer has no use) and is therefore more responsive to changes in global commodity prices and manufacturing industry trends than the consumer price index.

In general, the PPI is more volatile with larger fluctuations than the CPI, and is useful only in giving a sense of the underlying price developments that are not always reflected on the consumer’s bills.

The PPI is one of the oldest indicators in existence, and its time series can be stretched back to the 19^th century. It’s updated each month by the BLS (Bureau of Labor Statistics).

KEY POINTS

• The producer price index is the measure of changes in prices charged by wholesalers to their clients, such as retailers.
• It is one of the two major measure of inflation, along with the Consumer Price Index (CPI)
• Since the producer is at the beginning of the supply chain, PPI can be an early warning system for changes to retail prices.
• PPI is more sensitive to economic changes that CPI because it also includes commodities and intermediate materials.

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