What Is the PPI, or Producer Price Index?

What is the PPI?

The PPI tracks the prices that producers and manufacturers receive for their goods from retailers and distributors. “In general, the PPI is about the price change from the perspective of the seller,” says Thomas McDonald, a senior economist at the BLS. Higher prices on the producers’ end often lead to increased prices for consumers, he adds.

The PPI rises when producers and manufacturers sell their products at higher-than-usual prices, likely to offset the rising costs of raw material or distribution. So retailers wind up paying higher prices from the wholesaler, and consumers then pay higher prices from the retailer.

In this way, PPI functions as a measure of inflation, along with the consumer price index, or CPI, which tracks the prices consumers pay for goods and services.

» 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).

October PPI report

The index increased 0.2% in October. Compared to a year ago, the index rose 2.4%.

Core PPI, which excludes food, energy and trade services, was up 0.3% in October and 3.5% compared to a year ago.

Final demand services: Prices for final demand services increased 0.3% in October, according to the report.

• A 3.6% increase in prices for portfolio management drove the overall increase in final demand services prices. 

• Prices also rose for machinery and vehicle wholesaling; airline passenger services; computer hardware, software and supplies retailing; outpatient care (partial); and cable and satellite subscriber services.

• Prices fell for apparel, footwear, and accessories retailing; securities brokerage, dealing, investment advice and related services; and truck transportation of freight.

Final demand goods: Prices for final demand goods ticked up 0.1% in October after falling for two months in a row.

• The report attributes this month’s increase to an 8.4% rise in carbon steel scrap prices.

• The report noted higher wholesale prices for meats, diesel fuel, fresh and dry vegetables, as well as oilseeds.

• Meanwhile, wholesale prices decreased for liquified petroleum gas, eggs, processed poultry and ethanol.

» 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 released?