Producer Price Index (PPI) Definition
Define PPI In Simple Terms
The Producer Price Index stands in contrast with the Consumer Price Index which measures the change in prices at the retail level, rather than at the producer level.
What Does PPI Mean In Finance?
The PPI is a figure published by the Bureau of Labor Statistics (or BLS).
According to bls.gov, “PPIs are available for the output of nearly all industries in the goods-producing sectors of the U.S. economyÃ¢â‚¬ ¦ [and] the PPI program covers approximately 72 percent of the service sector’s output.”
The PPI sample includes data from over 25,000 establishments providing approximately 100,000 price quotations per month.
3 Classification Structures of the PPI
The PPI index computes the change in prices using three primary classification structures:
- Industry Level Classification measures the changes in total net output by industry, which is the aggregate sales prices for an industry’s output sold outside the industry.
- Commodity Classification organizes products and services by overall similarity, material composition, and end use, regardless of industry classification.
- Final Demand-Intermediate Demand (FD-ID) categorizes goods and services according to whether the buyer is an end user, known as “final demand,”or is used as inputs for the production of another good, known as “intermediate demand.”
What is a PPI used for?
The uses of the Producer Price Index include:
- A contract adjustment tool—a clause can be added to long-term contracts that the contract may be adjusted using the percent change in the PPI
- An indicator of inflation, either at the overall producer level or for particular industries and products
- A comparison of input and output costs
- A “deflator”of other economic data, such as calculating the “real”growth of a nation’s Gross Domestic Product rather than its nominal growth