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[i]Producer Price Index
[/i] Definition: The PPI is not as widely used as the CPI, but it is still considered to be a good indicator of inflation. Generally, the PPI is also collected by governments and it's considered to be among the most authoritative statistics.
This indicator measures and reflects the change of manufacturers’ cost of raw materials and semi-finished goods retrieving data from production and manufacturing firms across several sectors (manufacturing, agriculture, mining and utilities ). The PPI is also a basket of various indexes covering a wide range of areas affecting domestic producers. Like the Consumer Price Index, the PPI compares the current price index to a base value of 100 – this means that a PPI value of 115 is 15% higher than the original
base.
Why does it matter? The PPI, while not as strong as the CPI in detecting inflation - because PPI includes goods being produced -, can be used as a leading indicator to forecast future CPI releases.
The PPI index printing higher figures suggests an expanding economy with reasonable assurances of continued employment for those working in the manufacturing sector. An increasing PPI value could also indicate an interest rate hike intended to fight inflation. For Forex traders and followers of the real interest differential model, a rise in interest rates means an increase in the demand
for the currency as investors can expect increased returns.
But concerns over increasing inflation, specially in the US,may outweigh benefits of a high interest rate (see the monetary model of exchange rate determination in the previous section). So overall, the effect of PPI on the USD is moderate in comparison to other markets.
You should also note that the PPI report is the first of the inflation-based reports available each month. It will usually receive close scrutiny as traders look for signs of inflation or deflation that could impact on the CPI released shortly after.
For the long-term trader the PPI and CPI numbers are used to track price pressures that can help to anticipate inflationary consequences in the near future.
The short-term trader, in turn, will not be so much interested in forecasting interest rate changes, but rather use the PPI as
leading indicator to estimate the CPI result since this indicator has ultimately more impact on the market. If you follow this approach, don't forget to spot for oil prices as they also will impact on the CPI index.
Released by: US Department of Labor; Bureau of Labor Statistics.
Frequency: It is released in the second full week of every month, covering the previous month's data.
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