Producer Price Index
Producer price index (PPI) is a family of price indices that measures the average change over time in the selling prices received by domestic producers for their goods and services. It is distinct from the consumer price index (CPI), which measures prices paid by consumers. Because the PPI captures price changes at earlier stages of production, it is often regarded as a leading indicator of consumer inflation.[1]
Definition
The PPI measures price changes from the perspective of the producer rather than the consumer. In practice, many countries publish several PPI series, including an index for the output of goods-producing industries and, less commonly, indices for services and construction. The industrial producer price index—the price of goods as they leave the factory—is the most widely reported variant.[1]
Relationship to other measures
| Index | Perspective | Description |
|---|---|---|
| Producer price index (PPI) | Producer | Average change in prices received by domestic producers for their output. |
| Consumer price index (CPI) | Consumer | Average change in prices paid by households for a basket of goods and services. |
| GDP deflator | Whole economy | Ratio of nominal to real GDP, covering all domestically produced output. |
PPI movements often precede movements in the CPI, because changes in producer costs are typically passed through to consumers with a lag. However, the strength of this pass-through varies with the structure of the market and the competitive conditions facing firms.[1]
Uses
The PPI is used for several purposes:
- As an early indicator of inflationary pressure in the economy.
- As a tool for deflating time-series data, to convert nominal values into real values.
- As a basis for indexation in long-term contracts and for price adjustment clauses.
- In economic analysis by governments, central banks, and businesses.