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The Producer Price Index Program, or PPI program, is a group of indexes that measure the average changes of domestic selling prices over time. PPIs measure the changes of price from the seller’s perspective, which contrasts with the Consumer Price Index (CPI) that measure price changes from the perspective of the purchaser. Approximately 10,000 PPIs are released every month for a wide variety of products and groups of products. PPIs represents the output of almost all goods-producing sectors in the economy. This ranges from fishing to finances to forestry products. The PPI program covers approximately 70 percent of the service sector’s output.
A Brief History
The PPI program actually began as the Wholesale Price Index (WPI) that started in 1902. It was renamed to the Producer Price Index in 1978. At this time, the emphasis changed from a single index that encompassed the whole economy to three organized indexes that cover the standard production stages. This change minimized counting redundancies and misinformation that was inherent in aggregated index. The PPI system once against shifted in 2014 when it transitioned from the Stage of Processing (SOP) system to the Final Demand-Intermediate Demand (FD-ID) system. This new system expands the index coverage through adding exports, constructions, government purchases and the prices and weights for services. Interestingly enough, the original term Wholesale Price Index was misleading because the index never actually measured wholesale market price changes.
What are the Purposes of the PPI Program?
There are three main uses of the PPI program. First, the government and business community rely on PPIs as a type of economic indicator. The PPI program is now stronger than ever because the new FD-ID system now also covers finished goods and goods that are domestically produced for local markets. These new indexes help economists better monitor inflation rates from the producer’s perspective for goods and services that are specifically sold for export, capital investment, government purchase and personal consumption. The new Intermediate Demand index means that economists can simultaneously monitor commodity type and production flow. PPIs are used to adjust economic measurements and translate them into dollar amounts that are inflation free. PPIs are also used as the basis for contract escalation because PPI data tracks sales and purchase sales contracts.
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PPI vs. CPI
Even though both the PPI and Consumer Price Index (CPI) measure price changes for specific goods and services over time, there are three major differences. These include the coverage of the services sector, the sets of goods and services and the types of prices collected. The PPI program includes the entire economic spectrum of almost all goods and services created by American producers. This includes intangible services, such as capital investments, and tangible products, such as goods produced for consumption by the construction industry. The CPI’s set of items includes goods and services purchased by urban consumers, such as imports, and owners’ rent. These are not included in the PPI, which is the only index to measure items of personal consumption that consumers do not purchase, such as insurance and medical services.
The Producer Price Index Program provides economists and policy makers with highly detailed and relevant data regarding aggregate purchasing trends.
