Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Producer Price Index (PPI)

What it is:

The Producer Price Index (PPI) is used to measure the change over time of the average price of goods produced domestically.

How it works (Example):

The producer price index consists of a weighted index of goods prices at wholesale. PPI is divided into three levels. The first is the PPI commodity Index, which shows the average price change over a certain time period (usually a month) for commodities like crude oil and coal.

The second level is the PPI stage of processing (SOP), which consists of goods that are in a manufacture stage between raw and finished, and will be sold to other manufacturers to create the finished goods. Examples include cotton, gasoline and steel.

The third and final PPI level consists of finished goods. That is, they have undergone their final stage of manufacturing and will be sold to consumers. The finished goods level is the source of the core PPI.

Core PPI is the primary economic indicator. [InvestingAnswers Feature: Leading Economic Indicators Cheat Sheet] Core PPI is a price index for finished goods except those in the food and energy sectors because of their high price volatility.

Why it Matters:

PPI of finished goods is a direct indicator of the near-term level of the Consumer Price Index (CPI). This is because changes in prices at the retail level (finished goods) are directly transferred to consumers at the point of sale. Since the CPI is the primary indicator used to measure inflation in an economy, the PPI is a preview of changes in the rate of inflation.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...