Producer Price Index (PPI).

Definition: A measure of change in wholesale prices of goods and services received by their producers.

PPI reflects the dynamics of change in prices domestic producers sell their output at at the wholesale level. Before 1978 this index was known as the Wholesale price index. Producer Price Index measures changes in prices in all stages of precessing (crude, intermediate, and finished). PPI includes manufacturing and other commodities (agriculture, etc). Imports are not included but they have impact on PPI through prices of imported raw materials and components.

PPI is the first released indicator of inflation. It reflects changes in wholesale prices either as they leave their place of production or as they enter the production process. PPI is calculated on the basis of prices of about 3450 goods to their prices in 1982, the basis period when PPI is considered to be equal to 100. PPI includes the following types of goods:

Finished goods are of great importance. These are commodities that are ready for sale to the final individual or business consumer. PPI and CPI differ because of government grants, various taxes and delivery charges. Nevertheless in case of inflation at the wholesale level consumer prices inflation should be expected as well. There are two types of this index: PPI and core PPI, that is PPI excluding volatile food and energy.

Usually PPI increase precedes CPI rise that is why this index is referred to as a leading indicator of inflation. Moreover producer price index increase triggers cost-push inflation, the worst kind of inflation as analysts believe, as it has a stronger impact on economy than demand inflation does.

PPI is used as indicator of inflation in future.

Source: Bureau of Labor Statistics, U.S. Department of Labor.

Released: monthly at 8:30am ET for the prior month

Market Importance: Middle

Analysis: In 2006 PPI slowed down, in September – October the indicator dropped sharply and reached the lowest level within the last year, it regained the losses sharply in November-December. Within the last half a year the indicator remained almost the same.

Analysis: PPI fluctuations are quite volatile, within the last several months core PPI decreased sharply, in November-December it increased.

Conclusion:
Average monthly oil prices decreased sharply in January by 12%, which will impact PPI. Annual rates of growth of PPI ex energy and food increased to 2.0% in December, though in the mid-term perspective they tend to fall. Annual PPI also has recovered, it is at 1.2% level. Energy resources prices decline may trigger PPI rates of growth slowdown. Figures may be worse than forecasted.