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Commissioner’s Corner

# Why This Counts: What is the Producer Price Index and How Does It Impact Me?

Tuesday, April 10, 2018

The Producer Price Index (PPI) – sounds familiar, but what is it exactly? Didn’t it used to be called the Wholesale Price Index? It is related to the Consumer Price Index, but how? How does the PPI impact me?

Lots of questions! In this short primer we will provide brief answers and links for more information. Note, if you are an economist, this blog is NOT for you. It’s an introduction for everyone else!

Video: Introduction to the Producer Price Index

Before we go any further – what is an index? (You said this was a primer!)

An index is like a ruler. It is a way of measuring the change of just about anything. Producer price indexes measure the average change in prices for goods, services, or construction products sold as they leave the producer.

Here is an example of how an index works:

• Suppose we created an index to track the price of a gallon of gasoline.
• When we start tracking, gasoline costs \$2.00 a gallon.
• The starting index value is 100.0.
• When gasoline rises to \$2.50, our index goes to 125.0, which reflects a 25-percent increase in the price of gasoline.
• If gasoline then drops to \$2.25, the index goes to 112.5. The \$0.25 decline in price reflects a 10-percent decrease in the price of gasoline from when the price was \$2.50.

If you are a gasoline dealer, you might find a gasoline index useful. Instead of driving around every day to write down the prices of each competitor’s gasoline and averaging them together, the index can provide the data for you. (Question #5 in the PPI Frequently Asked Questions explains how to interpret an index.)

PPI is called a “family” of indexes. There are more than 10,000 indexes for individual products we release each month in over 500 industries. That is one big family!

OK, so PPI has lots of data – but what kind of data?

PPI produces three main types of price indexes: industry indexes, commodity indexes, and final demand-intermediate demand (FD-ID) indexes.

An industry refers to groups of companies that are related based on their primary business activities, such as the auto industry. The PPI measures the changes in prices received for the industry’s output sold outside the industry.

• PPI publishes about 535 industry price indexes and another 500 indexes for groupings of industries.
• By using the North American Industry Classification System (NAICS) index codes, data users can compare PPI industry-based information with other economic programs, including productivity, production, employment, wages, and earnings.

The commodity classification of the PPI organizes products by type of product, regardless of the industry of production. For example, the commodity index for steel wire uses pricing information from the industries for iron and steel mills and for steel wire drawing.

• PPI publishes more than 3,700 commodity price indexes for goods and about 800 for services.
• This classification system is unique to the PPI and does not match any other standard coding structure.

We also have more information on the differences between the industry and commodity classification systems.

The FD-ID classification of the PPI organizes groupings of commodities by the type of buyer. For example, the PPI for final demand measures price change in all goods, services, and construction products sold as personal consumption, capital investment, export, or to government. As a second example, the PPI for services for intermediate demand measures price change for services sold to business as inputs to production.

• PPI publishes more than 300 FD-ID indexes.
• This FD-ID classification system is unique to the PPI and does not match any other standard coding structure.

Now let’s go back to the beginning

• 1902: Wholesale Price Index program begins, which makes it one of the oldest continuous set of federal statistics. The Wholesale Price Index captures the prices producers receive for their output. In contrast, the Consumer Price Index captures the prices consumers pay for their purchases.
• 1978: BLS renames the program as the Producer Price Index to more accurately reflect that prices are collected from producers, rather than wholesalers.
• PPI also shifts emphasis from a commodity index framework to a stage of processing index framework. This minimized the multiple counting that can occur when the price for a specific commodity and the inputs to produce that commodity are included in the same total index. For example, think of gasoline and crude petroleum both included in an all-commodities index.
• 1985: PPI starts expanding its coverage of the economy to include services and nonresidential construction. As of January 2018, about 71 percent of services and 31 percent of construction are covered.
• 2014: PPI introduces the Final Demand-Intermediate Demand system.
• The “headline” number for PPI is called the PPI for Final Demand. It measures price changes for goods, services, and construction sold for personal consumption, capital investment, government purchases, and exports. We also produce a series of PPIs for Intermediate Demand, which measure price change for business purchases, excluding capital investment.
• Let me give you an example: Within the PPI category for loan services, we have separate indexes for consumer loans and business loans. The commodity index for consumer loans is included in the final demand index and the commodity index for business loans is mostly in an intermediate demand index.
• The Frequently Asked Question on the PPI for Final Demand provides even more information on this new way of measuring the PPI. The blog, Understanding What the PPI Measures, may also be helpful.
• We also have an article that explains how the PPI for final demand compares with other government prices indexes, such as the CPI.

Why is the PPI important?

To me?

• Inflation is the higher costs of goods and services. Low inflation may be good for the economy as it increases consumer spending while boosting corporate profits and stocks.
• A change in producer prices may be a leading indicator of consumers paying more or less. Higher producer prices may mean consumers will pay more when they buy, whereas lower producer prices may mean consumers will pay less to retailers. For example, if the PPI gasoline index increases, you may see an increase soon at the pump!

To others (which may impact me!)?

• Policymakers, such as the Federal Reserve, Congress, and federal agencies regularly watch the PPI when making fiscal and monetary policies, such as setting interest rates for consumers and businesses.
• Business people use the PPI in deciding price strategies, as they measure price changes in inputs for their goods and services. For example, a company considering a price increase can use PPI data to compare the growth rate of their own prices with those in their industry.
• Business people adjust purchase and sales contracts worth trillions of dollars by using the PPI family of indexes. These contracts typically specify dollar amounts to be paid at some point in the future. For example, a long-term contract for bread may be escalated for changes in wheat prices by applying the percent change in the PPI for wheat to the contracted price for bread.

Video: How the Producer Price Index is Used for Contract Adjustment

PPI is a voluntary survey completed by thousands of businesses nationwide every month. BLS carefully constructs survey samples to keep the number of contacts to a minimum, making every business, large and small, critical to the accuracy of the data. We thank you, our faithful respondents! Without you, BLS could not produce gold-standard PPI data.

Finally, check out the most recent monthly PPI release to get all the latest numbers. Head to the PPI Frequently Asked Questions to learn more. Or contact the PPI information folks at (202) 691-7705 or ppi-info@bls.gov.