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PPI - Producer Price Index

What is PPI?
The PPI (Producer Price Index) is a price index that is designed to capture movements in prices at the wholesale or producer level. It is similar in function and use to the CPI, and is likewise used in gauging inflation in an economy. The main use of the PPI is its ability to predict consumer prices, on the basis that eventually movements in costs will eventually be passed on to consumers. Similar to the PPI, some countries also calculate a wholesale price index, indeed the US used to calculate a wholesale price index, but the PPI has been deemed more relevant and useful.

How does it relate to Markets?
The PPI is released prior to the CPI, so it will give an early warning on how inflation is tracking, aside from being an inflation indicator, the PPI will also feed into revenue estimates and valuations for manufacturing and producing companies on the stock market. The rationale is that rising prices received by producers will (holding volumes constant) increase revenues. Similar to CPI, the central bank or monetary authority will closely monitor PPI in forming their views on inflation outlook, and thus setting monetary policy; so any significant trends developing in the PPI data should be noted in this context (e.g. accelerating increases will likely point to future inflation and thus, potentially tighter monetary policy). 

Components
In the US figures, 3 headline indexes are reported:
PPI Commodity Index (crude) - this shows price movements at the commodity level e.g. crude oil, scrap steel, etc. This is basically the raw materials/inputs stage of production.
PPI Stage of Processing (SOP) - this shows price movements in processed inputs, i.e. partially finished goods that are sold on for further processing and manufacturing e.g. timber, cotton, diesel, etc.
PPI Industry Index (finished) - this one shows price movements at the final stage of manufacturing; i.e. this is the core PPI metric, this measures the prices received by manufacturers. 

Sources and further reading:
IMF - Background, Purpose, and Uses of Producer Price Indices
US Bureau of Labour Statistics - PPI
Investopedia - Producer Price Index
Yahoo Finance - PPI: Producer Price Index
Economy Watch - Wholesale Price Index

Graph Library:
Metric - PPI

Original Source: http://www.econgrapher.com/encyclopedia-ppi.html

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