Of the two most common price indexes, the PPI is the second most important. The indicator measures price changes at the producer level, and is useful as an indicator of pipeline price pressures. The term “pipeline pressure” means the passing over of costs from producers to consumers. It is one of the more important factors that determine the CPI.
The PPI is not a major market mover, because price pressures at the retail level are often less acute and volatile than what firms experience at the producer level. Retailers have more concerns governing the passing of costs than producers. Competition, market share, and customer loyalty might necessitate that the firm refrain from communicating the effect of the PPI to consumers.
PPI value depends mostly on commodity market trends, and U.S. factory output. Inventory dynamics also play a significant role in establishing the cycle of falling or rising PPI. On the whole, the PPI is a far more volatile version of the CPI, and it is only useful as a broad guideline for future trends in the CPI. A high PPI means that the future profits of retailers will be squeezed, but it does not signal anything conclusive about the feelings of consumers. A falling PPI, on the other hand, is a better indicator that future CPI will tend to be subdued, since firms will prefer to maintain competitive power with few price raises if the PPI remains stable.
The data is released monthly, and is one of the second-tier pieces of information with useful value, but limited application beyond the calculation of CPI.
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