Producer Price Index (PPI)

Importance: ***

Definition: The producer price index (PPI) is the first indicator of inflation each month. It is a measure of wholesale prices at the producer level for consumer goods and capital equipment. Unlike the CPI, it does not include services. It compares prices for approximately 3,450 commodities to a base period. Currently, the base period, which equals 100, is the average prices that existed in 1982.

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Related Indicators:

Source: Department of Labor

Frequency: Monthly

Availability: Two to three weeks following the reported month.

Direction: Procyclical as inflation tends to go up in booms and fall during recessions.

Timing: Coincident indicator

Volatility: Medium/High

Likely Impact on Financial Markets:

Ability to affect markets: High if there are large unexpected changes in  inflation rates.
Analysis of the Indicator:
High price inflation is bad news for the bond market. A weak % rate of change of the price deflators  is received favorably by bond investors; a strong inflation report causes concern the Fed might need to intervene and raise interest rates--a negative for the fixed income market.
The PPI categories and respective weightings are:  Finished Consumer Goods 40% ; Food 26%;     Capital Equipment 25%; Energy 9%. The data covers three stages of production: finished goods, intermediate goods (those that are paritially processed), and crude materials. The latter two stages are important because they provide an early indication of price changes in the pipeline and forewarn of rising prices. The PPI can be volatile. It is best to use the six-month to one-year moving average. The bond market reacts negatively to larger-than-expected increases in the PPI. Conversely, drops in the index are viewed favorably by investors, pushing bond prices up and yields down.

WEB Links

A Graph of the latest PPI data from The Economic Statistics Briefing Room of the White House.

The latest PPI report from BLS.
See the Dismal Scientist Homepage for charts, tables and analysis of the latest PPI report.