What is the producer price index?

In looking into what measures average changes in prices in primary markets of the United States by producers of commodities in all states of processing, we would look at the Producer Price Index. This economic indicator which gauges the average changes on prices received by domestic producers for their output at all stages of processing.

The components broken down included with this indicator are:

1. Industry sector (commercial production of sales or goods)
2. Commodity (physical substance as foods, grains, or metals)
3. Processing stage (steps or preparation)

Up until 1978, the Producer Price Index (PPI) was known as the Wholesale Price Index or (WPI). This is one of the oldest statistical data tracking systems. This is compiled from the Federal government to help keep the economy strong and healthy.

This report is sent out around the 13th of the month, about 8:30 am Eastern. The report comes a day ahead of the more important Consumer Price Index, which measures retail prices and is the government's key inflation gauge

The data found in the Producer is a systematic sampler of the manufacturing, mining and service industries. The Bureau of Labor Statistics publishes the Producer Price Index monthly.

Investors are watching and looking for clues to see changes in inflation when the Federal Reserve might feel comfortable cutting short-term interest rates.

Movements of price indexes from one month to another usually should be expressed as percent changes, rather than as changes in index points, because the latter are affected by the level of the index in relation to its base period, while the former are not.

Currently you can find every kind of mining, fishing, agriculture and manufacturing industry in the (PPI). There are always new industries added to the Producer Price Index all the time.

Each month there are over 100,000 prices gathered from over 30,000 production and manufacturers.

The information gathered for the PPI is purely on voluntary basis. Absolutely essential to the success of the bureau is the data and the accuracy of that data. The information is kept confidential and is protected by law.

The PPI is kept with several classification systems. Each of these has their own structure, classifications, and uses.

Standard Industrial Classification (SIC) system is used to collect the needed data. Then the SIC processes that information. This system was developed in cooperation with Canada and Mexico, and categorizes producers into industries based on the activity in which they are primarily engaged.

The PPI core leaves out the food and energy sectors that often tend to be more volatile. This then gives us a clear picture of the underlying inflation trends.

The PPI or Producer Price Index is not necessarily used as much as the CPI or Consumer Price Index, however, it is still considered to be a great indicator of inflation.

There are weaknesses and strengths involved with the Producer Price Index, they are as follows:

Strengths

1. This report measures the prices of goods prior to being sold to retailers. Therefore, it can predict movement at times.
2. It is often used to deflate revenue streams.

Weaknesses

1. It excludes prices for exported goods.

The way this can be measures is using the headline number in the percentage change from the prior month, however the year to year changes are watched and recorded also. This way you can see the increasing and decreasing of inflation.