Economic Indicator “PPI” – Health Now, Wealth Forever

Spread the love

By Gary, on January 27th, 2014

Where GDP, GNP and CPI are historic economic indicators (based on numbers reported prior to the date calculated).

But another meaningful economic indicator is PPI – “Producer Price Index”. This index measures price trends instead of historic values, although the historic prices do pay a part in creating the trends.  For some older citizens, you will remember the Producer Price Index as the Wholesale Price Index.

The basic definition of PPI is that it “is a weighted index of prices measured at the producer level, not the consumer level.  Imports are not included.”

The PPI shows the trends in the wholesale markets and leaves the price changes at the consumer level to the Consumer Price Index, CPI.  It is also based on reports from the Bureau of Labor Statistics.   All of the physical goods-producing industries that make up the U.S. economy are included, but imports are not.
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 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 create the finished good. Some 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 main attraction, which is the finished goods index minus the food and energy components, which are removed because of their volatility. The PPI percentage change from the prior period and annual projected rate will be the most printed figure of the release.

The PPI looks to capture only the prices that are being paid during the survey month itself. Many 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 future values or contract rates.

Note:  PPI annual change is presented on a percentage basis, because the nominal change can be misleading since the base number is not exactly 100.

The PPI, in the eyes of investors, has the ability to predict the CPI.

The 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, investors 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.

While the PPI used to cover just the “physical goods” industries such as mining, manufacturing, and the like, many services-based industries have been brought into the index over time. Investors can now find PPI information on air and freight travel, couriers, insurers, healthcare providers, petroleum distribution and many more in the detailed release.

PPI Strengths:

  • Most 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)
  • Can move the markets positively
  • Data is presented with and without seasonal adjustment

PPI Weaknesses:

  • Volatile elements, such as energy and food, can skew the data.
  • Not all industries in the economy are covered.

Summary of the PPI:
The PPI gets a lot of exposure for its inflationary foresight and, as such, can be a big market mover. As a result, the PPI is very useful for investors in the industries covered in terms of analyzing potential sales and earnings trends.