The PPI aims to capture the prices of all first-stage goods produced in the United States.  

Ant Rozetsky via Unsplash; Canva

What Is the Producer Price Index (PPI) in Simple Terms?

The producer price index, or PPI, is a monthly estimate of the weighted average prices U.S. “producers” (think suppliers, wholesalers, etc.) receive for the products and services they create—mostly for other businesses. In other words, it is an estimate of the average value of all first-stage domestic products and services for a given month.

The producer price index, like the consumer price index (CPI), is an important economic indicator calculated and published monthly by the Bureau of Labor and Statistics.

PPI vs. CPI: What Is the Difference?

The consumer price index (CPI) measures the average cost of goods and services purchased by consumers (a.k.a end-users) in the U.S. In other words, it is a calculation of the estimated value of products and services at their final destination—the citizen. For this reason, it includes imported products and services, and sales tax is included in its component prices

PPI, on the other hand, measures the cost of goods and services when they first leave their origin—when they are sold wholesale by their producers (usually to other businesses, often many steps before they reach consumers). Sales tax is not included in the PPI’s component prices, and imports are omitted because the PPI only takes domestic-produced products into account.

Note: PPI and CPI do have some overlap, as certain products and services are sold directly from U.S. producers to U.S. consumers.

How Does the PPI Relate to Inflation?

CPI is an estimate of cost of living for consumers, so changes in CPI over time can be used to estimate the rate of inflation as it affects the average citizen. In the same way, changes in PPI over time are used to estimate wholesale, or “back-end” inflation—how much the cost of doing business is increasing due to supply prices.

These two types of inflation are closely tied. If a business has to pay more to its suppliers to create its consumer-facing products and services, it is usually going to charge consumers more for those products and services in order to maintain its margins. In this way, PPI is a leading indicator—an increase in PPI often directly precedes an increase in CPI.

How to Measure Wholesale Inflation Using the PPI

To estimate the rate of wholesale inflation over a particular period of time, simply subtract the older PPI from the more recent, then divide the result by the former and multiply by 100.

Let’s say we wanted to calculate the rate of wholesale inflation from March 2021 to March 2022. First, we’d need to gather the PPI value for each of those months.

March 2021 PPI: 122.90
March 2022 PPI: 137.08

Rate of Wholesale Inflation = (137.08 – 122.90) / 122.90
Rate of Wholesale Inflation = 14.18 / 122.90
Rate of Wholesale Inflation = 0.1154
Rate of Wholesale Inflation = 11.54%

So, the rate of wholesale inflation (as estimated by the PPI) from March 2021 to March 2022 was 11.54 percent. That’s quite high for a single year, which makes sense due to the shortages and supply-chain issues that were occurring at that time.

How Is the PPI Calculated?

The PPI is essentially calculated by dividing the average weighted prices of goods and services produced in the U.S. during the current month and year by the average weighted prices of goods and services produced in the U.S. in a base month and year then multiplying the result by 100.

Note: The real calculation is a bit more complex—it takes the changing quantities of goods and services produced into account and is adjusted for seasonality, but the above description provides the essence of the calculation.

PPI calculations use 100 (the value for the base year 1982) as their base value, so subtracting 100 from any PPI provides an estimated rate of wholesale inflation since 1982.

What Does It Mean When the PPI Changes?

When the PPI goes up over time, it means that the cost of production is going up. In other words, businesses’ input costs are rising, and wholesale inflation is occurring. This can occur for a variety of reasons, including scarcity of natural resources and supply-chain issues.

If, on the other hand, the PPI goes down over time, this indicates that the cost of production is going down, or that wholesale deflation is occurring. This can occur when demand for certain materials decreases or when supply

Frequently Asked Questions (FAQ)

Below are answers to some of the most common questions investors have about the PPI that were not already addressed in the sections above.

Which Industries Are Included in the Calculation of the PPI?

The PPI aims to capture all domestic production, and most of the products used in its calculation fall into one of the following 10 categories:

MiningManufacturingAgricultureFishing Forestry Natural gasElectricityConstructionWasteScrap materials

What Is the “Core” PPI?

While the headline PPI number includes price data for all industries, the core number excludes industries known to be highly volatile, like the food and energy sectors.

When and How Often Is the PPI Released?

Each month, usually around the 13th or 15th at 8:30 am Eastern time, the BLS releases PPI values for the previous month.

Can the PPI Be Negative?

Since prices are always positive, the PPI cannot be negative, but changes in the PPI can occur in a negative direction. In other words, in an environment of wholesale deflation, PPI can go down month-over-month.