What Is the Producer Price Index (PPI)?
The producer price index (PPI), published by the Bureau of Labor Statistics (BLS), measures the average change over time in the prices domestic producers receive for their output.
It is a measure of inflation at the wholesale level of the economy compiled from thousands of indexes measuring producer prices by industry and product category.
- The Producer Price Index (PPI) measures change in the prices paid to U.S. producers of goods and services
- The PPI is a measure of wholesale inflation, while the Consumer Price Index (CPI) measures the prices paid by consumers.
- The BLS calculates thousands of PPI indexes based on the product or service sold, the industry of the producer and the economic identity of the buyer, which are then used to calculate the overall monthly change in final demand PPI.
- PPI indexes are used to calculate price changes in private contracts based on suppliers' input prices.
Producer Price Index (PPI)
Understanding the Producer Price Index (PPI)
The PPI measures inflation (or, much less commonly, deflation) from the perspective of the product manufacturer or service supplier. Conversely, the consumer price index (CPI) measures price changes encountered by the consumer.
The price trends for producers and consumers are unlikely to diverge for long, since producer prices heavily influence those charged consumers, and vice versa. In the short term, inflation at the wholesale and retail levels may differ as a result of distribution costs, as well as government taxes and subsidies.
The U.S. Bureau of Labor Statistics (BLS) releases the PPI along with its constituent industry and product indexes during the second week of the month following the reference date of the survey.
The PPI reading for the 12-month period ending April 2022. Wholesale inflation was down slightly from the 11.5% reading in March.
The PPI is based on approximately 100,000 monthly price quotes reported voluntarily online by more than 25,000 systematically sampled producer establishments. The survey covers the entirety of the U.S. output of goods and about 71% by value of services. The PPI's component product and services indexes are weighted based on the value of the category's output to calculate the overall change in producer prices.
The PPI is used to forecast inflation and to calculate escalator clauses in private contracts based on the prices of key inputs. It is also vital for tracking price changes by industry and comparing wholesale and retail price trends.
Until 1978, the PPI was known as the wholesale price index (WPI). In 1982, the BLS reset all producer price index bases to 100.
Why PPI and CPI Diverge
The PPI often measures prices based on the first commercial transaction for a product or service, in contrast with the CPI's focus on the final sale. But the two don't just differ based on the type of prices measured. There are also important compositional differences between the PPI and the CPI based on what's included and left out.
For example, the PPI does not measure price change for aggregate housing costs, while the CPI's shelter category including the imputed owners' equivalent of rents accounts for one-third of the overall index. Meanwhile, the PPI incorporates a weighting of nearly 18% for health care products and services not far off the sector's weight of nearly 20% in the U.S. Gross Domestic Product (GDP). In contrast, because the CPI does not measure third-party health care reimbursements, its weighting for medical care is below 9%.
Another key distinction is that the PPI does not include the price of imported goods, unlike the CPI. Conversely, the PPI includes export prices while the CPI does not, by definition.
How PPI Numbers Are Presented
The BLS produces more than 10,000 product and industry price indexes each month it then uses to calculate the PPI. They're published with and without seasonal adjustments, and are divided into three categories.
Industry Level Classification
The PPI includes indexes for producer prices received in each of more than 500 industry categories based on output sold outside the industry. The categories are compatible with those used in other releases to report industry-level data on production, employment, earnings, and productivity.
Commodity classification disregards the producer's industry to group output based on the nature of product or service. The PPI report publishes more than 3,800 commodity price indexes for goods and some 900 for services.
Final Demand-Intermediate Demand (FD-ID)
The FD-ID indexes use the commodity indexes organized by product to measure producer prices based on the economic identity of the buyers and whether the goods sold require further processing. The PPI report publishes more than 600 FD-ID indexes. The final demand indexes, as distinct from the intermediate demand ones, are then used to arrive at the headline PPI number, which reflects the Producer Price Index for final demand.