Our economy has two inflationary measures: the Consumer Price Index (CPI) and the Producer Price Index (PPI). The Consumer Price Index (CPI) is a metric that measures the total value of goods and services purchased by consumers over time. The Producer Price Index (PPI) measures inflation from the producers’ perspective.
In this article, we will focus on the Producer Price Index (PPI).
What is Producer Price Index (PPI)?
The Producer Price Index is a set of indices that measures the average change in selling prices received by domestic goods and service producers.
The amount paid by the producer from the purchaser for a unit of item or service produced as output is known as the producer’s price. It doesn’t include tax deductions, the supplier’s retail and wholesale margins, or separately invoiced transportation and insurance costs.
The producer prices can be expressed in one of these two ways:
List Price
A list price is the price of a product as stated in the producer’s price list, catalogue, or website, among other places. This is the total price, excluding any discounts, fees, or rebates that could apply during the transaction.
Market Price
The price determined by buyers and sellers in an open market is known as the actual transaction price or market price. It’s also known as the “net price” because it includes discounts, fees, and rebates that have been applied to the transaction.
Producer Price Index (PPI) Uses
PPIs are widely used by the business community as well as by the government. Two primary uses are:
Deflator of Other Economic Data
PPIs account for price changes in other economic time series and convert them into inflation-free dollars. For example, constant-dollar GDP numbers are calculated using deflators based on PPI data.
Basis For a Contract Modification
PPI statistics are often used to adjust, buy and sell contracts. These contracts usually include monetary sums to be paid at some time in the future.
PPI VS. CPI
PPI and CPI are economic indicators, but they are not the same.
PPI is an index that depicts the average price changes for a domestic producer’s output. On the other hand, CPI is an index used by the government to calculate the overall level of inflation. Another difference is that PPI’s primary goal is to deflate revenue streams in order to assess production growth. In contrast, CPI is used mainly to adjust income and spending.
Prices for capital equipment and consumer items are included in the Producer Price Index, while fees for services are excluded. Meanwhile, the CPI consists of a vast range of products and services, including food, drinks, alcohol, housing, and entertainment, among other things. The key components needed to determine PPI are the commercial production of goods/sales (Industry Sector), physical substances, such as food and grains (Commodity), and steps of preparation (Processing Stage).
Another difference between the two is that while calculating PPI, sales and excise taxes are not taken into consideration. CPI, on the other hand, includes the price collected for products.
Five PPI Terms
Gross Domestic Products (GDP)
The GDP is the total monetary worth of all goods and services generated by the entire economy during a specific time period. It is the most extensively used metric for measuring economic performance.
Inflation
Inflation is an economy’s overall upward movement in the prices of goods and services. Continuous price increases are interpreted as a loss of money’s purchasing power. The CPI and PPI are commonly used to calculate inflation.
Deflator
In order to establish volume estimates, a “deflator” is a statistical tool that converts current dollars into inflation-adjusted dollars. Deflators, such as the PPI, revalue goods and services at reference period prices.
Input PPI
A change in the prices of goods and services purchased as intermediate inputs by domestic producers is measured by an input PPI. It applies to domestically produced and imported intermediate inputs, with a valuation based on the purchaser’s pricing.
Output PPI
A change in the prices of goods and services sold on the domestic market as exports are measured by an output PPI. The finished goods data are generally the most closely inspected since they are the greatest indicator of what buyers will have to spend in the end.
Takeaways
- PPI stands for Producer Price Index.
- The Producer Price Index tracks the average change in selling prices.
- Producer prices can be expressed in two ways: List Price and Market Price.
- Two primary uses of PPIs are as a Deflator of other economic data and as a basis for a contract modification.
- PPI and CPI share a similarity in being economic indicators. However, they are not the same in any way.
