Producer Price Index

The producer price index (PPI) for all commodities is an index of the domestic price level that the United States Bureau of Labor Statistics estimates and publishes once a month. It is concerned only with domestic producers and the prices that they receive for their output. The PPI ranks among the oldest economic indicators assembled and reported by the Federal Government. It owes its origins to a resolution passed by the United States Senate in 1891. This resolution authorized the Senate Committee on Finance to look into the impact tariffs had “on the imports and exports, the growth, development, production, and prices of agricultural land manufactured articles at home and abroad.”(Senate Committee on Finance, 1893) In 1902, the United States Department of Labor published a bulletin on the course of wholesale prices between 1890 and 1901, marking the first publication of a U.S. price index. Until 1978, the PPI was called the “wholesale price index.” The change in name was intended to emphasize that the PPI aims to measure the prices received by producers from the first buyers.

The PPI for all commodities and the consumer price index (CPI) provide the two main measures of monthly inflation in the United Sates. Whereas the CPI emphasizes the retail prices of goods and services relevant for a family’s or household’s cost of living, the PPI measures what prices output bring for the producers rather than for the retailers. It includes all kinds of goods absent from the CPI, such as business capital equipment. The PPI includes the price of footwear, but it also includes the prices of leather, hides, and skins. The prices of agricultural and construction equipment are reflected in the PPI, but not in the CPI. The prices of aircraft, ships, and railroad equipment help make up the PPI.

The PPI for all commodities incorporates fifteen different commodity groupings. The groupings are Farm Products; Processed Foods and Feeds; Textile Products and Apparel; Hides, Skins, Leather, and Related Products; Fuels and Related Products and Power; Chemicals and Allied Products; Rubber and Plastic Products; Lumber and Wood Products; Pulp, Paper, and Allied Products; Metals and Metal Products; Machinery and Equipment; Furniture and Household Durables; Nonmetallic Mineral Products; Transportation Equipment; and Miscellaneous Products. Indexes are calculated for each one of these sub-groups, as well as for individual commodities within these subgroups. As a case in point, there is a price index for Fuels and Related Products and Power subgroup. The fuel subgroup is broken down into further subgroups including crude petroleum, refined petroleum products, electric power, and gas fuels. A price index is also reported for each of the subgroups within the Fuel subgroup.

The PPI calculations also make available price indexes for subgroups based on the stage of processing. A finished goods index provides a price index for a class of goods ready to be purchased by final users. They need no further processing and may be either durable or nondurable goods. Finished goods include capital equipment for business firms. Another index measures the cost of intermediate materials, supplies, and components. The intermediate goods undergo some processing before they serve as material and component inputs to other manufacturing and construction activities. Another index measures the cost of crude materials, which are unprocessed goods and raw materials.

In the calculation of the PPI, the Bureau of Labor Statistics make allowances for changes in the quality for products. Suppose the cost of a new automobile rises by $500, but $300 of the price increase is owed to extra safety equipment required by new government regulations. The PPI only counts $200 of the price increase as an increase in the price of automobiles.