What Is a Product Price Index (PPI) and How to Read It?
The Product Price Index (PPI) is just one of the many measures of changes in commodity’s prices. The prices for this data are based on the products sold. As a result, the prices covered by the PPI refer not to what a purchaser pays but to what the producer receives. Thus, it does not include indirect taxes like sales taxes and tariffs since the money does not go to the components of production like labor, capital or profit. Any other expense that does not directly involve in the making of the product is not included in the Product Price Index.
For a certain industry, the PPI is based on the finished product ready to be sold or delivered to the consumer which excludes any transportation expenses that happens after the product is released outside the factory gate that does not include distribution services performed by the retail or wholesalers. It is then called, Industrial Product Price Index (IPPI).
The PPI series in the industry is considered a high-quality or high-value indicator for several reasons, the most important being its relevance, namely what the PPI in the industry measures. The index measures the movement in prices for manufactured goods destined for domestic or export consumption. This translates to a ready measure of economic performance of the manufacturing sector. As well, the PPI in the industry series is of value in analytical studies of price formation and behavior, it is frequently used in the process of contract escalation, and often serves as a representative input into other price index series. At times, its involvement is important if not indirect, as in the case of trade issues or disputes. For example, in the case of softwood lumber, certain provinces tie their stumpage fees to the relevant PPI in the industry series.
In a certain farm for example, the PPI is considered as the monthly series that measures the changes in the prices that farmers for the agricultural goods they produce and sell. They call it Farm Product Price Index (FPPI).
For the farmers, the PPI is an important indicator of the economic activity in the agriculture sector. The data provided by PPI in the farm is useful to the producers, producers groups, and analysts from private sectors like the grain companies, meat processors, international exporters, the banking sectors, and the government agencies responsible for agricultural policies.
Another factor that affects the PPI is the rise and fall of the value of such country’s currency against the US. The PPI of those products that are being exported changes for time to time. Then, when the prices of raw materials, labor, and other components of the product change, surly, the PPI will vary.
Better yet, the cheaper or lesser the raw materials and the labor in making the product, does not mean that the product is of good quality. PPI is only one of the many factors to be considered in the business.