Understanding Inflation Data: PPI

[If you would like a brief review of ways to measure inflation and the most important U.S. monthly inflation indices you should read Understanding Inflation Data: An Introduction first and then return to this article that is about the PPI, the producer price index]

The PPI or the Producer Price Index is published by the Bureau of Labor Statistics (the BLS) an independent agency of the U.S. federal government. The BLS publishes PPI data in the middle of the month after the data were collected (data for June 2008 will be released on July 15; see here for the release schedule).

The PPI set of indexes measures price changes from the perspective of the seller, in comparison to the CPI that measures price changes from the consumer’s perspective. These two price indices may differ because of government subsidies, sales or excise taxes and distribution costs.

The BLS calculates the prices of about 100,000 prices from 25,000 estabishments every month (see here for the BLS handbook explaining the methods used to assemble the data). There are three separate reports:

  • Prices by industry (see here for the most recent table): there are price indexes for 600 industries, ranging from manufacturing to services and health care.
  • Prices by commodity (see here for the most recent table): there are price indexes for 2000 commodity groups.
  • Prices by stage of processing (see here for the most recent table): there are price indexes for finished goods, intermediate goods and crude goods, with and without food and energy.

The PPI weights prices using data from the 1997 economic census (see here) and some 2002 data.

The PPI does not attract the same degree of attention as the CPI, partially since it is not used as frequently by policy makers. In the past, the PPI was regularly published a few days before the CPI and was viewed as a forecast of consumer prices; now the CPI published before the PPI around half the time. Even so, the BLS appears to spend considerable energy improving the report. The BLS believes that the PPI is more of a work in progress, in transition from a report that measured the prices of goods to a report that will measure the entire domestic output prices of goods and services.

The most interesting use of the PPI (in this economist’s view) is as a way to view the transmission of inflation through the economy, the so-called “pass through”. By looking at the stage of production indices you can see whether increases in commodity prices in crude goods result in increases in prices of finished goods. A great puzzle of recent years has been the lack of pass through, meaning that increases in the prices of oil and food have not, so far, resulted in increases in finished goods prices.

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