PRODUCER PRICE INDEX

Definition

The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods paid by producers.

Importance

The producer price index for finished goods is a major indicator of commodity prices in the manufacturing sector. These prices are more sensitive to supply and demand pressures than the more comprehensive consumer price index. Producer price changes are considered a leading indicator for consumer price changes.

Why do Investors Care?

The PPI measures price changes in the manufacturing sector. Inflation at this producer level often gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. Investors need to monitor inflation closely. Just knowing what inflation is and how it influences the markets can put an individual investor head and shoulders above the crowd. (See CPI notes) By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.

Interpretation

The bond market will rally when the PPI decreases or posts only small increases, but bond prices will fall when the PPI post larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

Frequency
Monthly.

Source
Bureau of Labour Statistics, U.S. Department of Labour.

Availability
Usually the second week of the month.

Coverage
Data are for the previous month. (Data for June are released in July.)