What Is the PPI, or Producer Price Index?
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Updated Oct. 14 to add the most recent PPI figures.
Current index: The PPI was unchanged between August and September and increased 1.8% in the past 12 months. That’s according to the Oct. 11 release from the U.S. Bureau of Labor Statistics, which updates the PPI monthly.
What is the PPI?
The PPI tracks the prices that producers and manufacturers receive for their goods from retailers and distributors. “In general, the PPI is about the price change from the perspective of the seller,” says Thomas McDonald, a senior economist at the BLS. Higher prices on the producers’ end often lead to increased prices for consumers, he adds.
The PPI rises when producers and manufacturers sell their products at higher-than-usual prices, likely to offset the rising costs of raw material or distribution. So retailers wind up paying higher prices from the wholesaler, and consumers then pay higher prices from the retailer.
In this way, PPI functions as a measure of inflation, along with the consumer price index, or CPI, which tracks the prices consumers pay for goods and services.
» MORE: Why is everything so expensive?
PPI categories
In calculating the PPI, the BLS sorts products and services into two categories: final demand and intermediate demand.
Final demand refers to goods and services sold by the producer to retailers or distributors, who intend to sell those products to consumers.
Examples of a final demand good include, well, pretty much any physical product you could buy: clothes, computers, furniture, cosmetics — you get the picture. Examples of final demand services include air travel, internet, home security, cleaning services and financial advisement, according to the BLS.
Intermediate demand refers to goods and services sold to other manufacturers to be used in the production of other goods.
Here’s an example McDonald provides to explain how businesses use the PPI. Say you have a contract to pave and repave roads with Fictional County. In your contract, you’d likely include a clause that allows you to raise your price if, say, the PPI’s asphalt index rises (in other words, if asphalt becomes more expensive).
September PPI report
PPI didn’t change in September. Compared to a year ago, the index rose 1.8%.
Core PPI, which excludes food, energy and trade services, was up 0.1% in September and 3.2% compared to a year ago.
Final demand services: Prices for final demand services increased 0.2% in September, according to the report.
Prices rose for deposit services (partial), machinery and vehicle wholesaling, furniture retailing, desktop and portable device application software publishing, apparel wholesaling and airline passenger services.
Prices fell for professional and commercial equipment wholesaling; securities brokerage, dealing, investment advice and related services; as well as for consumer loans (partial).
Final demand goods: Prices for final demand goods decreased 0.2% in September.
Meanwhile, wholesale prices increased for processed poultry, electric power and motor vehicles.
» MORE: What Is the PCE?
How is the PPI calculated?
Once a month, the BLS solicits roughly 100,000 prices for specific products or groups of products from participating sellers. Then, those prices are weighted against their price in a “base” year, which for many products is 1982.
In addition to classifying products based on final demand or intermediate demand, the BLS sorts products and services by industry. It also categorizes them by commodity classification, which is solely based on their material composition.
When is the PPI released?
The BLS releases a monthly PPI report showing how the index changed. The next PPI report, which will reflect changes to the index in October, is scheduled to be released Nov. 14.
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