The Producer Price Index is one of the most significant forward-looking indicators for determining inflationary risk. The PPI is released every month by the Bureau of Labor Statistics and tracks selling prices from the producer's point of view.
The PPI includes data from nearly 10,000 individual products produced in the U.S. and reflects changes in the cost of production which is summarized for three core areas: 1. Industry Index 2. Commodity Index 3. Stage of Production Index.
Until 1978, the PPI was known as the Wholesale Price Index but was changed to the Producer Price Index in 1982 and the prices for that year are now used as the baseline for the indexes.
The PPI Commodity Index covers raw materials such as coal, crude oil and other commodities.
The Industry Index measures goods that are in the final stage of production and is also referred to as the core PPI.
The Stage of Production Index tracks prices that manufacturers pay for goods that are sold to them that will be used to produce finished products. Lumber, diesel fuel, and steel are a few of the predominant products in the SOP index.
The PPI is used to predict inflation because it is tracking the costs of manufacturing which, when are affected by inflation are then passed on to consumers.