Forex Trading

What is the Producer Price Index (PPI)?

Producer production line

Learn more about the Producer Price Index (PPI)

The Producer Price Index (PPI) determines the average change in prices which are received by local manufacturers for their output. It can also be termed as weighted index of prices which are calculated at the wholesale level or producer level. National statistical agencies calculate a number of indices and the Producer Price Index is one of them. Weight of PPI is being spoiled by the steady decline in manufactured items as a share of spending.

The PPI is generally meant to confirm the movement in the wholesale markets, commodities markets and manufacturing industries. It includes all of the physical goods-producing industries making the economy of a country but imports are not incorporated in it.

The PPI release consists of three headline index figures which include PPI Commodity Index (Crude), PPI Stage of Processing (SOP) Index (Intermediate) and PPI Industry Index (Finished). PPI Commodity Index normally indicates the average price variation for the commodities like crude oil, steel scrap, coal, etc from the last month.

The goods incorporated in the PPI Stage of Processing Index (Intermediate) are being produced at some level but these goods will be put up for sale to other manufacturers in order to generate the finished product. A couple of examples of Stage of Processing (SOP) products are cotton, lumber, and diesel fuel. The PPI Index (Finished) indicates the last phase of manufacturing and forms the source of the foundation of PPI.

The core PPI figures are the most important source of attracting the traders’ attention. It is calculated by subtracting the food and energy components from the finished goods index. The food and energy components are eliminated due to their instability and unpredictability. The variation in the PPI should always be represented on a percentage basis because small amendment in the PPI can be deceptive. The traders mostly utilize PPI for predicting the value of CPI.

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