Producer Price Index Explained: What Is the PPI?

The US Producer Price Index, or PPI for short, is a collection of indexes economists use to measure the average change over time in domestic producers’ prices for their products or services. This information provides a picture of the marketplace from the perspective of sellers. PPI data is one of the most valuable windows into the operation of the US economy, covering critical information on a vast range of economic activities.

Producers voluntarily report data directly to the US Bureau of Labor Statistics (BLS), then the BLS aggregates and publishes the information monthly. The PPI offers a close indicator of what producers are getting for their products.

The Producer Price Index and the Consumer Price Index are price indexes that measure the economic activity, but there are critical differences between the two:

• Purchases: The Producer Price Index (PPI) is a broad index that provides a detailed sampling of all the goods and services bought by producers, sold in the retail sector, and directly purchased by other producers or consumers.
• Price changes: The Consumer Price Index (CPI) explicitly measures price changes on the goods and services consumers purchase, often from retailers. These differences help to illustrate different aspects of the overall economic activity.
• Usage: The CPI can measure changes in the cost of living, while the PPI calculates the real growth of an economy or a sector, such as wholesaling or construction.

Economists, government officials, and business executives use the PPI in several ways to study the domestic economy and conduct business operations. Some of the PPI’s uses include:

1. 1. Economic indicator: This is the primary use for the PPI, as it informs calculations in the percent changes of what producers are getting for their products. This affects decisions by the central bank, the Federal Reserve, and other government officials. Other indicators, such as gross domestic product (GDP), will often be adjusted based upon the PPI. Supply and demand determine commodity prices for natural gas, steel, and wheat items. For example, a spike in demand can affect the price producers charge, and in turn, the PPI.
2. 2. Escalation: The PPI is a factor in the forming of contracts. The technical term for this is “escalation,” meaning that an agreement can have conditions based upon changes neither party can effect. If a contract is adjusted for inflation, the selling prices indicated by the PPI will factor in.
3. 3. Deflation: Economists can use the PPI to adjust other indexes, specifically via deflation. Price inflation is a very common and essential variable in economic measurements. The PPI can adjust for deflation to get to a constant baseline for price comparison for the real price of commodities.

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