The Producer Price Index (PPI) measures the average change in selling prices that domestic producers receive over time. In other words, PPI measures inflation from wholesale producers’ perspectives.

The Producer Price Index, explained

Technically, the PPI isn’t one index, but a family of indexes.

The U.S. Bureau of Labor Statistics (BLS) collects voluntarily-submitted price data from about 25,000 establishments covering around 100,000 products.

This information is then divided into ~10,000 PPIs for individual products and product groupings. Some 500 PPIs are calculated for industry-level pricing in most good-producing industries, including agriculture, construction and manufacturing. The PPI program also collects data for nearly three-quarters of the service sector’s output.

Then, the BLS uses these indexes to calculate the headline PPI – the number that gets reported monthly. Comparing this figure against month-ago and year-ago results helps measure inflation among producers.

Three PPI classifications

PPI indexes are divided into three main categories:

• Industry-level classifications measure the prices an industry receives for goods sold outside the industry. The PPI includes 500 industry grouping indexes, 535 industry indexes and 4,000 product and product sub-category indexes.
• Commodity-level classifications organize products and services by similarity or composition. Around 3,700 PPIs exist for goods and 800 for services, organized by product, service and final use. 
• Final demand-intermediate demand (FD-ID) classifications group prices by buyer identity and how “finished” a product is. Over 600 FD-ID indexes measure price changes for goods, services and construction to intermediate and final demand customers. 

Note that final demand PPIs are used to calculate the “headline” PPI, illustrating “finished” product prices.

PPI vs CPI

The PPI family differs from the Consumer Price Index (CPI).

PPIs measure price changes for producer-purchased goods and services. Meanwhile, the CPI measures the change in prices that consumers pay.

These differences are important for several reasons.

Firstly, seller and producer prices may differ due to government subsidies, distribution costs, taxes and sales. This can ultimately affect CPI inflation.

Secondly, because PPI changes occur earlier in the product line, producer indexes are often seen as a leading indicator of consumer price inflation.

The indexes further differ in several data points. For example, while PPI excludes aggregate housing cost changes, the CPI weights shelter at nearly 33%. And though CPI weights healthcare at 9%, PPI’s healthcare weighting is closer to 18% due to third-party reimbursements.

How does the Producer Price Index affect you?

PPI prices mark the first commercial transaction for many products and services. Thus, these numbers mark the baseline that many producer – and later consumer – prices build on. Because producer price changes occur early in the pipeline, the PPI is often considered a leading indicator of consumer inflation.

As an investor, that means the PPI can provide insights and speculation into future consumer-level inflation, rate hikes and investment trends.

In the short-term, these changes can impact your portfolio’s performance as inflation rises. (And if you want to shield yourself against the ensuing volatility, Q.ai’s Inflation Kit makes a great place to start.)

But even when PPI numbers shift, it’s important to remember that the impacts likely won’t last. Often, keeping sight of your long-term goals and staying the course is the best path to building long-term wealth.