The producer price index (PPI) is a statistical measure of the average movement in the selling prices received by producers of goods and services within a country. It tracks prices from the seller's side, at the point where output leaves the producer, in contrast to the consumer price index, which tracks what households pay in shops. PPIs are compiled by national statistical agencies, usually monthly, and are among the most closely watched indicators of inflation.
In practice a PPI is a family of indexes rather than a single number, covering individual industries, commodities and stages of production. It is used by central banks and forecasters to gauge price pressures building in supply chains, by statisticians to convert output measured in money into volumes, and by businesses to adjust prices in long-term contracts.
What it measures
A PPI records the price the producer actually receives. Sales and excise taxes are excluded, because they are not revenue to the producer, whereas subsidies received on products are generally included. Transport costs and the margins of wholesalers and retailers are not part of the price of a manufactured good, although distribution may be measured as a service in its own right. Imports are excluded, since they are not domestic production; many agencies publish separate import and export price indexes. Prices are those for first commercial sales, including sales to other businesses, to government and for export.
Coverage was historically limited to mining, manufacturing, agriculture and utilities. Statistical agencies have progressively extended it to construction and to services such as transport, wholesale and retail trade, finance, health care and professional services, which now account for most output in advanced economies.
How the index is compiled
Agencies survey a sample of producers and ask them each month for the transaction price of specified products sold on specified terms. Keeping the specification fixed matters: if the product changes, for instance a vehicle gains new equipment, statisticians estimate the value of the change so that the index reflects price movement and not quality improvement. Individual price changes are combined using weights based on the value of each product's sales in a base period, most commonly with a fixed-weight formula in which weights are updated every few years.
Results are published by industry, by product and by stage of the production process, and many series are seasonally adjusted.
The United States and other countries
The United States index is published by the Bureau of Labor Statistics and is one of the oldest continuous federal statistical series, dating from 1902. It was known as the Wholesale Price Index until 1978. Since 2014 the headline measure has been the PPI for final demand, which covers goods, services and construction sold for personal consumption, capital investment, government and export. It is accompanied by indexes for intermediate demand, which follow prices of inputs at earlier stages.
In the European Union, Eurostat publishes industrial producer prices for the domestic and non-domestic markets, along with services producer prices. Some countries, including India, continue to use the wholesale price index, a related but older concept.
Relationship with consumer prices
The PPI and the consumer price index differ in several ways:
- Coverage. The PPI includes capital equipment, goods sold to government and exports, none of which households buy. The consumer index includes imports and, in many countries, housing costs, which the PPI does not.
- Price basis. The PPI excludes taxes on products and distribution margins on goods; the consumer index includes everything the buyer pays.
- Position in the chain. Producer prices, especially for raw and intermediate materials, respond quickly to commodity and energy costs, while consumer prices respond later and by less.
Because of the last point, the PPI is often read as a leading indicator of consumer inflation. The link is real but loose. Producers may absorb cost changes in their margins, retailers may do the same, and services make up a much larger share of consumer spending than of goods-dominated producer indexes. Measures of core inflation and headline inflation exist for both.
Uses
The first use is in macroeconomic analysis. Central banks conducting monetary policy under inflation targeting monitor producer prices for early signs of changing cost pressure, and financial markets react to surprises in the monthly release.
The second is deflation of economic statistics. To measure real growth in output, statisticians divide the value of sales by an appropriate price index; detailed PPIs are the main deflators used in compiling gross domestic product by industry, and they feed the GDP deflator.
The third is contract escalation. Long-term supply, construction and defence contracts frequently contain clauses that adjust the price in line with a named PPI series for the relevant material or industry, sharing the risk of cost changes between buyer and seller.
Limitations
Producer price indexes face the general problems of price measurement, including adjusting for quality change, capturing discounts, and keeping weights current as the economy's structure shifts. Services are difficult to price consistently. The aggregation of prices from several stages of production can count the same cost change more than once, which is one reason agencies moved to demand-based systems. International comparisons are imperfect because coverage and methods vary.