The Producer Price Index (PPI) is a key gauge of the cost of goods before they reach consumers

The PPI measures the cost of goods before they reach the consumer. It can be used to forecast consumer inflation measured by the CPI.

• The Producer Price Index (PPI) measures the change in prices paid to US producers of goods and services.
• The PPI is comprised of voluntarily reported information from more than 25,000 establishments.
• The US Bureau of Labor Statistics compiles the data and publishes it monthly.

The Producer Price Index (PPI) is a monthly measure of the rate of change in prices paid to US producers of goods and services. It's used in business and government as a measure of wholesale inflation and is seen as a leading indicator of increases in consumer prices.

How does the PPI work?

The US Bureau of Labor Statistics (BLS) publishes PPI data each month. It measures the average change over time in the selling prices received by domestic producers across a wide range of industries for their output.

The PPI comprises voluntarily reported information from more than 25,000 establishments that provide approximately 100,000 price quotes per month, according to the BLS. 

The data is broken down further into approximately 10,000 PPIs for individual products and groups of products in nearly all good-producing industries. A few examples include the mining, manufacturing, agriculture, and construction sectors. Approximately 500 PPIs are available for industry-level prices, and more than 3,700 PPIs are available for commodity classifications. Additionally, the PPI program collects information for approximately 72% of the service sector's output.

An analysis of these reported numbers results in the PPI for the month. These numbers are compared with the previous month and the previous year to measure inflation, which is most commonly expressed as a percentage change.

Why does the Producer Price Index matter?

The PPI is a leading indicator of consumer inflation. That's because when producers are charging more at the wholesale level, retailers and other companies further down the supply chain often have to charge higher prices to compensate for rising costs. 

"PPI is simply one way to get a measure on the level of inflation in an economy," says Nicholas Creel, assistant professor of accounting and business law at Georgia College and State University. "It, like any other inflation measure, can tell us how the value of our currency is fluctuating. This can inform us as to how to structure our behavior." 

"For example, if inflation is expected to be high, borrowing rates to should go up to compensate for the fact that the value of the money repaid over time is expected to be decreasing," Creel says.

"For consumers, high inflation makes it such that the value of sitting on cash goes down as the purchasing power is eaten away, therefore encouraging their spending or investing money rather than saving it," says Creel.

Producer Price Index vs. Consumer Price Index

The PPI is a measure of wholesale costs. In contrast, the Consumer Price Index (CPI) is a measure of costs for consumers. 

Since consumer prices are affected by producer prices, understanding both indexes is key. 

"The PPI can give us a good idea of how the CPI is going to be affected in short order, as the change in a producer's costs are usually passed on to the consumer," says Creel. "So, if the PPI is rising we should expect to see the CPI rise soon thereafter."

The correlation between the PPI and the CPI can also be used to help determine why consumer inflation is increasing, Creel explains.

For example, in May 2022, US politicians were debating the root causes of surging consumer inflation, with some attributing it to largely corporate greed. However, data released that month showed the PPI rose 10.8% year over year, wjh ich the CPI increased by 8.6%. 

"We can largely dispel that explanation and instead reason that increased producer costs are simply being passed on to the consumer," Creel says.

Where to find the Producer Price Index

Wholesale prices often impact the final costs for consumers.

If you want to keep tabs on the Producer Price Index, you can find the data through the BLS. Typically, the updated PPI is made available during the second full week of the month.