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Economics - Producer Price Index




Release Date:
Second or third week of each month
Release Time:
8:30am Eastern Standard Time
Coverage:
Previous month
Released By:
Bureau of Labor Statistics (BLS)
Latest Release:
http://www.bls.gov/news.release/ppi.toc.htm


Background
The Producer Price Index (PPI) is a weighted index of prices calculated at the wholesale, or producer, level. Released monthly by the Bureau of Labor Statistics (BLS), the PPI shows trends within the wholesale markets, manufacturing industries and commodities markets. All of the physical goods-producing industries that make up the U.S. economy are included; imports are excluded.
The PPI release has three headline index figures, one each for crude, intermediate and finished goods on the national level:
1. PPI Commodity Index (crude): This figure shows the average price change from the previous month for commodities such as energy, coal, crude oil and the steel scrap. (For related reading, see Fueling Futures In The Energy Market.)
2. PPI Stage of Processing (SOP) Index (intermediate): Goods here have been manufactured at some level but will be sold to further manufacturers to produce the finished good. A few examples of SOP products are lumber, steel, cotton and diesel fuel.
3. PPI Industry Index (finished): Final stage manufacturing and the source of the core PPI.
The core PPI figure is the primary statistic, which is the finished goods index minus the food and energy components, which are removed due to their volatility. The PPI percentage change from the prior period and annual projected rate is the most quoted figure of the release.
The PPI attempts to capture only the prices that are being paid during the survey month itself. Quite often, companies that do regular business with large customers have long-term contract rates, which may be known now but not paid until a future date.The PPI excludes such future values or contract rates.
And as we've previously stated, the PPI does not represent prices at the consumer level - this is left to the Consumer Price Index (CPI), which is typically released a few trading days after the PPI. Like the CPI, the PPI uses a benchmark year in which a basket of goods is measured, and every year following is compared to the base year, which has a value of 100. For the PPI, that year is 1982.
Changes in the PPI should always be presented on a percentage basis, because the nominal changes can be misleading as the base number is no longer an even 100.
What It Means for Investors
The biggest attribute of the PPI in the eyes of many traders is its ability to predict the CPI. The prevailing theory is that most cost increases that are experienced by retailers will be passed on to customers, which the CPI could later validate. Because the CPI is the inflation indicator out there, traders will look to get a sneak preview by looking at the PPI figures. The Fed also knows this, so it studies the report intently to get clarity on future policy moves that might have to be made to fight inflation. (To learn more, read The Consumer Price Index: A Friend To Investors.)
Two downsides to the "basket of goods" approach are worth mentioning here. Firstly, the PPI uses relative weightings for different industries that may not accurately represent their proportion to real gross domestic product (GDP); the weightings are adjusted every few years but small differences will still occur. Secondly, PPI calculations involve an explicit "quality adjustment method" - sometimes called hedonic adjustments - to account for changes that occur in the quality and usefulness of products over time. These adjustments may not effectively separate out quality adjustments from price level changes as intended.
As well, PPI index data for capital equipment is used by the Department of Commerce to calculate the GDP deflater.
While the PPI used to cover just industries such as mining, manufacturing, and the like, many services-based industries have been brought into the index over time. Traders can now find PPI information on air and freight travel, couriers, insurers, healthcare providers, petroleum distribution and many more in the detailed release.
Strengths:
An accurate indicator of future CPI
Long "operating history" of data series
Good breakdowns for investors in the companies surveyed (mining, commodity info, some services sectors)
Data is presented with and without seasonal adjustment
Weaknesses:
Volatile elements, such as energy and food, can skew the data.
Not all industries in the economy are covered.
The Closing Line
The PPI gets a lot of exposure for its inflationary foresight. As such, it can be a big market mover and is therefore a very useful tool for forex traders.
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