A producer price index (PPI) is an economic index that keeps track of the cost of production, or wholesale prices, of certain goods and services. Many governments often have country-wide PPIs, and the rules governing what goes into those usually varies accordingly. In general, most PPIs aim to look at a wide range of goods and services produced in a country in order to help show how the overall economy is fairing. While a producer price index does not directly show changes in consumer prices, it is often used by economists and others to help predict such information.
PPIs are usually weighted indices, meaning that the value of commodities seen as more important to the overall economy have a greater impact than less significant commodities. This weighting is generally intended to help ensure that a change in a small sector of the economy doesn’t have the same effect on the PPI as larger sectors. Which commodity groups receive the highest rating often varies from country to country, relative to how important particular goods are in a set economy. In the producer price index created by the U.S. government, for example, fuels, which are often considered integral to all stages of manufacturing, are given significantly more weight in the calculation of the PPI value than consumer products such as office furniture, tobacco goods and other similar products.
The types of goods and services included in a producer price index also often varies from country to country. In the United States, it covers everything from basic goods, such as food to fuels, to more specialized products, such as medical equipment and household furniture. The producer price index for the United Kingdom includes similar categories, but also covers alcohol and other sectors, for example.
Many experts look to PPIs to determine the overall economic health of a country. In general, if the value of the producer price index is rising, it could signal possible inflation. If the value of a PPI starts to fall, it could signal a downward turn in the overall economy. PPIs are usually recalculated every month, so economists often watch for trends from one month to the next.
Economists and others also often watch the PPI to help predict what consumer prices will do. Consumer prices usually follow the general trend of producer prices, as an increase in wholesale costs of materials will generally increase the amount the end-user will need to pay for a given final product. The true indicator of consumer prices, and inflation for that matter, however, is usually a consumer price index, which is generally calculated separately from a PPI.