What the Producer Price Index (PPI) Says About Inflation

What is the PPI?

The PPI tracks the prices that producers and manufacturers receive for their goods from retailers and distributors. The PPI rises when producers and manufacturers charge higher prices for their products, likely to offset the rising costs of raw material or distribution.

In this way, PPI functions as another measure of inflation, similar to the consumer price index and personal consumption expenditures price index, which track the prices consumers pay for goods and services. But unlike those two indexes, the PPI shows how prices are changing for retailers who are buying at the wholesale level.

“In general, the PPI is about the price change from the perspective of the seller,” says Thomas McDonald, a senior economist at the BLS. That makes the PPI a leading indicator of inflation since higher prices on the producers’ end often lead to increased prices for consumers.

» MORE: Why is everything so expensive?

PPI categories

In calculating the PPI, the BLS sorts products and services into two categories: final demand and intermediate demand.

Final demand refers to goods and services sold by the producer to retailers or distributors, who intend to sell those products to consumers.

Examples of a final demand good include, well, pretty much any physical product you could buy: clothes, computers, furniture, cosmetics — you get the picture. Examples of final demand services include air travel, internet, home security, cleaning services and financial advisement, according to the BLS.

Intermediate demand refers to goods and services sold to other manufacturers to be used in the production of other goods.

Here’s an example McDonald provides to explain how businesses use the PPI. Say you have a contract to pave and repave roads with Fictional County. In your contract, you’d likely include a clause that allows you to raise your price if, say, the PPI’s asphalt index rises (in other words, if asphalt becomes more expensive).

December PPI report

The index increased 0.2% in December. Compared to a year ago, the index rose 3.3%.

Core PPI, which excludes food, energy and trade services, was up just 0.1% in December and 3.3% compared to a year ago, which is a slightly lower rate than what was reported in November.

The report indicates that most of the increase in the broader PPI stemmed from an outsized rise in goods prices. And that can be traced to higher energy prices, including an uptick in gas prices.

Final demand goods: Prices for final demand goods ticked up 0.6% in December after rising 0.7% in November.

• The report attributes this month’s increase to a 3.5% rise in energy prices.

• In addition to gas, the report noted higher wholesale prices for residential electric power, meats, motor vehicles, gas fuels and fresh fruits and melons.

• Prices fell for fresh and dry vegetables, carbon steel scrap and for residual fuels.

Final demand services: Prices for final demand services were unchanged in December, according to the report.

• Prices rose for transportation of passengers (partial), deposit services (partial), automotive fuels and lubricants retailing, food retailing, and chemicals and allied products wholesaling.

• Prices fell for traveler accommodation services, machinery and vehicle wholesaling, loan services (partial), food wholesaling and furniture retailing.

» MORE: What Is the PCE?

How is the PPI calculated?

Once a month, the BLS solicits roughly 100,000 prices for specific products or groups of products from participating sellers. Then, those prices are weighted against their price in a “base” year, which for many products is 1982.

In addition to classifying products based on final demand or intermediate demand, the BLS sorts products and services by industry. It also categorizes them by commodity classification, which is solely based on their material composition.

When is the PPI report released?