Producer Price Index (PPI)

What Is the Producer Price Index (PPI)?

The producer price index (PPI) 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 that is compiled from thousands of indexes measuring producer prices by industry and product category. The index is published monthly by the U.S. Bureau of Labor Statistics (BLS). The PPI is different from the consumer price index (CPI), which measures change in the price of goods and services paid by consumers.

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. The price trends for producers and consumers are unlikely to diverge for long since producer prices heavily influence those charged to 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 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. It 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. Its 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.

Producer Price Index (PPI) vs. Consumer Price Index (CPI)

Both PPI and CPI are important economic measures because they point to monthly changes in prices. But they reflect prices from different standpoints. As noted above, the producer price index measures prices based on the first commercial transaction for a product or service. This is in contrast to the consumer price index (CPI), which measures price changes encountered by the consumer.

The CPI's focus is on the final sale. But these two indexes don't just differ based on the type of prices measured. There are also important compositional differences between the PPI and the CPI that can be considered. These distinctions are based on what's included and left out of each.

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, the CPI's weighting for medical care is below 9%. That's because it doesn't measure third-party health care reimbursements.

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.

How Producer Price Index (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, commodity classification, and first demand-intermediate demand.

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

Commodity classification disregards the producer's industry to group output based on the nature of the 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 first demand-intermediate demand (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 PPI for final demand.