What is the Producer Price Index?

The producer price index is an indicator which shows the adjustment of prices from economic movement by the producers of a country. This index used to be called the wholesale price index in the United States and in the United Kingdom until 1978. It is calculated by collecting data on manufacturers’ orders and the costs associated with producing their goods. Costs included are salaries and wages, raw materials, transport and energy. The PPI is an important economic indicator, (reported monthly two weeks after the reporting month) because it measures adjustments up or down in the selling prices producers charge for goods and services. As such it is a valuable early indicator of inflation. The PPI reflects the price when the order is booked and not when the goods leave the factory gate. It therefore is an aspect of output for sellers and a cost factor for the buyers. It ensures that producers don’t charge the consumers too high prices.

The PPI numbers do not have a major impact on the markets and do not directly affect exchange rates but they do have a major role to play as far as investors are concerned. Investors look on the PPI as a general prediction of CPI (consumer price index) where inflation is concerned. Inflation is a sign that the purchasing power of a country's currency is in decline and each unit of local currency buys fewer goods and services. A rise in inflation has a very negative effect on a currency. PPI controls inflationary trends and prevents the local currency from depreciating too much. If a local currency becomes less valued because of inflationary pressure the demand for that currency decreases. This is especially evident if the country in question imports a high amount of goods and commodities that are considered valuable and needful, from a country that has low production costs. These goods become more expensive as the local currency declines against the exporters currency and the inflation rate rises in tandem as prices increase. 

Because each country is different and a 1 percent PPI for one country does not necessarily translate perfectly for another country, traders need to pay meticulous consideration to developing trends in inflationary numbers to help forecast future rates.