Understanding the Fundamentals | Producer Price Index

Almost all products, before landing into our very own hands, goes through a lot of process. Along those processes, are changes in its price. The basic framework goes like this: semi-products are first gathered and transported to manufacture or producer, after which it will be assembled or putted on together by the laborers to come up with a finished product. The finished product will be displayed and sold on the market afterward.

PPI takes into account all of this through its weighted index of prices. It is done through a wholesale level and consists of three major sub-categories: initial, intermediate, and final.

PPI Commodity Index (Initial) – changes on the average price of commodities( for the previous month are displayed in here.

PPI Stage of Processing (intermediate) – the current prices of the goods that had gone through certain level of processing which will be passed on to the producer for the final output are reflected in here.

PPI Industry Index (final) – this is the source of the core PPI and reflects the price for the finished products.

The first two sub categories are followed due to its capability to reflect inflationary or deflationary pressures. Meanwhile, most investors follow the third because it reflects the prices of the goods which will be for sale to the consumers. But the apple of the eye for the investors are the core PPI which is published along with the main index. Core PPI is a byproduct of the finished goods index minus the energy and food components.

Though the monthly PPI cannot affect the market reaction, its annual data are under the watchful eyes of the analysts mainly because PPI gives a sneak-peek of the CPI (Consumer Price Index). It will later on validated after the latter is released. As we all know, CPI is the inflation indicator which is very important in fundamental analysis.

Stephen Stevenson