What is the PPI?
The PPI is a family of more than 10,000 indexes covering the output of nearly all industries in the goods-producing sector of the U.S. economy and approximately three quarters of the service sector, as well as natural gas and electric utilities, construction, and goods competitive with those made in producing sectors (such as scrap materials). PPIs measure price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI), that measure price change from the purchaser's perspective. Sellers' and purchasers' prices may differ due to factors such as government subsidies, sales and excise taxes, and distribution costs.
Importance and Uses of PPI Data
- Contract escalation. It is often desirable to include an escalation clause in purchase and sales contracts that accounts for changes in input prices at some point in the future. For example, a long-term contract for bread may be escalated for changes in wheat prices by applying the percent change in the PPI for wheat to the contracted price for bread. (See PPI Escalation Guide for Contracting Parties.)
- Indicator of overall price movement at the producer level. PPIs capture price movement from the perspective of the producer or service provider. Therefore, they may foreshadow subsequent price changes for businesses and consumers. The President, Congress, and the Federal Reserve employ these data in formulating fiscal and monetary policies.
- Deflator of other economic series. PPI´s are used to adjust other time series for price changes and to translate those series into inflation-free dollars. For example, constant-dollar Gross Domestic Product (GDP) data are estimated using deflators based on the PPI.
- Measure of price movement for particular industries and products. Indexes for products and services are available by industry as well as by similarity of use or material composition. Along with a limited number of other special groupings, PPIs are also available grouped by the amount of processing products have undergone, known as stage-of-processing (SOP) indexes. (See PPI Databases.)
- Comparison of input and output costs. PPIs are published for items ranging from raw materials to finished products. Users may wish to compare, for example, how the PPI for machinery varies with changes in the PPI for raw metal.
- Comparison of industry-based price data to other industry-oriented economic time series. Industry-based PPI data can be used in conjunction with other BLS economic time series data (employment, unemployment, average hourly earnings, etc.) to provide a comprehensive overview of the industry. (See Industries at a Glance.)
- Forecasting. Examples range from individual companies forecasting cost of inventory to government agencies making forecasts about the national economy.
- LIFO (i.e., last-in, first-out) inventory valuation. The Internal Revenue Service recommends the use of PPI commodity data for LIFO inventory valuation purposes when filing business tax returns (See 26 USC § 1.472-8(e)(3)(iii)(B)(2)).
Last Modified Date: September 28, 2012