What the Producer Price Index (PPI) Says About Inflation
The index measures the prices of goods and services at the wholesale level of the supply chain.
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Updated on May 15.
Current index: The PPI decreased 0.5% between March and April, according to the most recent release from the U.S. Bureau of Labor Statistics. The index rose 2.4% year over year.
What is the PPI?
The PPI tracks the prices that producers and manufacturers receive for their goods from retailers and distributors. The PPI rises when producers and manufacturers charge higher prices for their products, likely to offset the rising costs of raw material or distribution.
In this way, PPI functions as another measure of inflation, similar to the consumer price index and personal consumption expenditures price index, which track the prices consumers pay for goods and services. But unlike those two indexes, the PPI shows how prices are changing for retailers who are buying at the wholesale level.
“In general, the PPI is about the price change from the perspective of the seller,” says Thomas McDonald, a senior economist at the BLS. That makes the PPI a leading indicator of inflation since higher prices on the producers’ end often lead to increased prices for consumers.
» 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).
April PPI report
Overall, the index decreased by 0.5% in April. Compared to a year ago, the index declined 2.4%.
Here are highlights from the latest PPI report:
Core PPI, which excludes food, energy and trade services, decreased 0.1% in April. It rose 2.9% compared to a year ago.
Final demand goods prices were unchanged in April after declining 0.9% in March — the largest decrease since October 2023, according to the report.
Final demand services prices decreased 0.7% in April — the largest decline since the index began in December 2009, according to the report.
» 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 report 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 May, is scheduled to be released June 12.