What Is the Producer Price Index (PPI)
2 min read · · Korean original
If the Consumer Price Index (CPI) measures inflation at the retail level, the Producer Price Index (PPI) measures inflation at the larger wholesale level. The PPI is released by the Department of Labor around the 11th of every month. How is the PPI measured, and how can it be interpreted?
Components of the PPI
The PPI is less important than the CPI, but it is an indicator that can influence changes in the CPI over the long term. The PPI is broadly made up of the following three indexes.
1) Raw materials: grain, livestock, oil, cotton, etc.
2) Intermediate goods: flour, leather, auto parts, cottonseed, etc.
3) Finished goods: bread, shoes, cars, clothing, etc.
Each producer price index can serve as a leading indicator for changes in the producer price index that follows it. For example, if grain prices rise, the prices of flour and bread may rise afterward as well.
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Interpreting the PPI
The PPI is closely linked to the CPI, which is known as the best measure of inflation. The PPI tends to react to inflation a little faster, and it influences the CPI over the long term.
When interpreting the PPI, Wall Street tends to focus on core PPI, which excludes food and energy. So a high PPI reading does not automatically mean that the prices of stocks, crypto assets and the like will fall.
If the PPI came in high because of rising food and energy prices while core PPI stayed stable, the market may expect the Fed not to raise rates further, and stock prices may rebound.
When interpreting the PPI, it is important to look beyond the final number and analyze where the increase or decrease came from, then interpret it accordingly.
