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A Look Into the Producer's Price Index

A Look Into the Producer's Price Index
You may have heard of the Producer’s Price Index (PPI) as it relates to manufacturing capacity and efficiency. The index’s moves in recent moves warrant a further examination of key drivers and consequences on the overall economy.

 

Producer price indices in manufacturing measure the rate of change in prices of products sold as they leave the producer. They exclude any taxes, transport, and trade margins that the purchaser may have to pay. PPIs provide measures of average movements of prices received by the producers of various commodities. They are often seen as advanced indicators of price changes throughout the economy, including changes in the prices of consumer goods and services.1

 

Manufacturing covers the production of semi-processed goods and other intermediate goods as well as final products such as consumer goods and capital equipment. A variety of price indices may be used to measure inflation in an economy. These include consumer price indices (CPI), price indices relating to specific goods and/or services, GDP deflators, and producer price indices (PPI). This indicator is presented for the total market and domestic market and is measured in terms of the annual growth rate and in the index.

 

Most Recent Changes in PPI

The latest readings from the PPI show an American economy that is overheated, with wholesale prices rising 10.8% in May, which is a near-record annual pace. Excluding food, energy, and trade, the so-called core PPI rose 6.8% on a year-over-year basis in May, matching April’s gain. The two PPI measures remained near their historic highs — 11.5% for the headline, and 7.1% for core, both hit in March.2

 

The data is significant in that prices at the wholesale level feed through to consumer prices, which are running at their highest levels since December 1981. The consumer price index increased 8.6% annually in May, defying hopes that inflation had peaked in the spring.

 

 

Similarly, around the world, major economies have seen producer prices increase dramatically compared to the baseline year 2015.

 

 

Why PPI Matters

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 produces more than 10,000 products 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. The following list provides additional detail on key comparisons and statistics.

 

1. 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.

 

2. 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.

 

3. 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.

 

4. 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.

 

Conclusion 

Recent movements in key price indicators impact the business climate of our customers. The PPI of finished goods is a direct indicator of the near-term level of the Consumer Price Index (CPI). This is because changes in prices at the retail level (finished goods) are directly transferred to consumers at the point of sale. Since the CPI is the primary indicator used to measure inflation in an economy, the PPI is a preview of changes in the rate of inflation.

At Exporta Wholesale, we are on a mission to help U.S. buyers manage rising input costs through the diversification of manufacturing partners and increasing reliability in the global supply chain infrastructure that powers regional economies.

 

About Exporta Technologies

Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States. 

 

Exporta’s marketplace offers buyers a full-service experience in the origination, sourcing, and managing of products. The platform was founded on the idea that curation and service are the most important elements in the buyer’s journey. Exporta’s marketplace is building technology that addresses the pains of sourcing products internationally at attractive prices.


References

  1. https://data.oecd.org/price/producer-price-indices-ppi.htm
  2. https://www.cnbc.com/2022/06/14/wholesale-prices-rose-10point8percent-in-may-near-a-record-annual-pace.html

 

 

 


 

 

 

 

 

 

 

 

 

 

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