The Producer Price Index (PPI) is an index released monthly by the Bureau of Labor Statistics (BLS). To put it in simple words, PPI measures price changes from the perspective of the sellers, as opposed to the Consumer Price Index (CPI), which measures price changes from the purchasers’ perspective.
One of the reasons that PPI is so valuable is because of its inherent ability to predict CPI as an indicator of inflation. The Fed makes use of the PPI data to prepare for future counter-inflation policies and investors can look in advance of the market and make business plans accordingly.
From the graph we can see that the percent changes from the previous year’s PPI fluctuate a lot but for the past few decades, the change is mostly positive. Note that PPI does not represent prices at the consumer level. PPI calculations use a benchmark year (1982) where the basket of goods (a weighted fixed set of consumer products and services in 1982) was measured with an index of 100.
Note that BLS states that since some PPIs such as the ones for food and energy goods, as well as wholesale and retail trade are more volatile than other goods in short-term, PPI calculates a number of indexes excluding prices for these components separately. In addition, an index for final demand less food, energy, and trade services is calculated as well. The weighting for different industries is updated once every five years. This is potentially problematic as PPI might not be able to reflect its proportion to real GDP very well.
Graphs added in association with comments