PPI Output Core


Producer Price Index gauges the average change in prices received by domestic producers for their output at all stages of processing, as it tracks changes in prices to raw materials and semi-finished goods. The index is similar to the CPI in depicting changes in prices on the producer levels nevertheless it does not include services.

The index compares the change in prices for commodities to a base period, usually expressed in a percentage change. The index is broken down into components by commodity, industry sector, and stage of processing and each criterion considers the following:

• Commodity: organizes products by similarity of end use or material composition

• Industry: measures the average change in prices received for an industry’s output sold to another industry

• Stage of Processing: regroup commodities according to the class of buyer and the amount of physical processing or assembling the products have undergone

The Producer Price Index is divided into two readings, Input Prices which is prices at factory gates which contains the change in prices of raw materials that undergo the manufacturing process, and Output Prices which is the change in prices factories reflect in their product.

The reading is usually released as well on the Core level, which if we look at Core output is the change in prices excluding the volatile items, such as energy, the eliminations to those variables provide a more accurate look at the overall trend of inflation.

From that stems the importance of this indicator as historically the correlation was seen between the change in prices on the producer level and the consumer level. Since they are similar in fashion the PPI anticipates a change on the CPI as eventually the rise in prices will reach to the final consumer. 

General Effect

Producer price index is a comprehensive index of wholesale price changes which indicates a future change in retail prices. PPI measures price change from the perspective of the seller. So in other words it is a measure of inflation. Any rise in prices from the producer's side will raise the prices throughout the channel to the final consumer.

In particular, the producer price indexes for all commodities foreshadow changes in the Consumer Price Index. An increase (or decrease) in these producer price indexes today are likely to be followed by a comparable increase (or decrease) in the Consumer Price Index.

Two things are taken into consideration when studying PPI; first, the price of purchasing the raw material for production and second, the demand of the final product. If the cost of purchasing raw materials goes up, then the price of the product itself will incline. Also, if the demand by the consumer increases, the price will inflate. Inclining demand will result to increased productivity which will require more labor. As seen before, more money in the hands of labor, leads to spending. This causes inflation and finally results to a rise in interest rates. The effect of this figure can be significant if the quarterly figures widely differ from the forecast and it will be a significant market mover.

The effect of a rise in this number will point to future hikes in key interest rates which drive the bond markets down and the combination of bond yields. Stocks and indices are also likely to be negatively affected as an increase in the PPI will point to higher interest rates which the stock market doesn't like to see…
For currencies the effect of high inflation can be uncertain, as from one side future interest rate hikes and modifications in the monetary policy is considered a strength to the currency; while at the same time high producer prices lower competitiveness in the overall markets.

Best Case ScenarioThe UK is going to release its PPI output core in which expectations show will fall further led from crippled consumers demand and plunging oil prices and the best case scenario would be if PPI remains steady or even rises slightly since the economy currently faces deflation risks which will prompt the BoE to extend their APF program to halt decline in prices.
Worst Case ScenarioThe worst case scenario would be if PPI output core falls at a faster rate then this would mean that deflation risks are rising while they are already dealing with recession which means longer time to recover from the downfall.