Producer price index
A producer price index is a price index that measures the average changes in prices received by domestic producers for their output. Formerly known as the wholesale price index between 1902 and 1978, the index is made up of over 16,000 establishments providing approximately 64,000 price quotations that the U.S. Bureau of Labor Statistics compiles each month to represent thousands of different goods and services.
Its importance is being reduced by the steady decline in manufactured goods as a share of spending. When manufacturers face increased production costs, businesses must reconsider their pricing approach by either:
- Absorbing higher manufacturing costs, which may maintain customer satisfaction but can impact the company's profitability.
- Transferring those costs to consumers, which may boost business profits, but means customers will face higher prices for the goods and services.
Coverage
The PPI system encompasses the production of all industries in the sectors involved in manufacturing goods:- Mining
- Manufacturing
- Agriculture
- Fishing
- Forestry
- Gas
- Electricity
- Waste
- Scrap materials
Calculation
The PPI is determined by taking the average weighted price of goods and services produced in the U.S. for the current month and year, dividing it by the average weighted prices of goods and services produced in the U.S. during a base month and year, and then multiplying the outcome by 100.For example, if the average weighted price of goods and services in the U.S. during July 2023 is $120, and the average weighted price during the base month, January 2022, is $100, the PPI for July 2023 would be calculated as follows:
PPI = x 100 = x 100 = 120
Thus the PPI for July 2023 would be 120.