Producer Price Index

The Producer Price Index (PPI) measures the average change in prices that producers (firms) receive for their goods and prices they pay for inputs. It is published by the Bureau of Labor Statistics monthly and is a leading indicator of consumer-price inflation — when PPI rises sharply, consumer inflation often follows months later.

The three stages

PPI is measured at three levels of the supply chain:

1. Raw materials: Crude oil, iron ore, wheat, cattle, timber. Highly volatile; often spikes months before consumer prices feel the impact.

2. Intermediate goods: Steel, chemicals, plastics used to make final products. The “middle” of the supply chain.

3. Finished goods: Ready-to-sell products (food, clothing, machinery) that firms sell to other firms or consumers. Closer to retail prices.

Higher-stage PPI typically leads lower-stage PPI. Oil PPI spikes → intermediate chemical PPI rises → finished goods PPI rises → CPI rises.

PPI as a leading indicator

Because PPI precedes CPI in the supply chain, it is a leading indicator of consumer-price inflation:

• Oil spikes sharply: Raw materials PPI (energy) surges. Six months later, gasoline prices at the pump rise, hitting CPI.
• Metal prices surge: Intermediate PPI spikes. Six months later, manufacturers raise prices on vehicles and appliances, hitting finished-goods PPI.
• Freight costs spike: Manufacturers raise prices to offset higher shipping. CPI follows.

In 2021-22, PPI surged months ahead of CPI, correctly signaling the coming surge in consumer prices.

Hedging and pass-through

Firms may or may not pass on higher input costs to consumers immediately:

• During strong demand: Firms can raise prices, and PPI → CPI pass-through is rapid (3–6 months).
• During weak demand: Firms absorb cost increases, and pass-through is delayed or incomplete.

In 2021-22, with strong demand, pass-through was fast. In previous periods with weak demand, firms absorbed higher costs and profit margins fell.

Headline versus core PPI

Like CPI, PPI comes in two forms:

Headline PPI:

• All items, especially raw materials and energy.
• Volatile; swings sharply with oil prices.

Core PPI:

• Excludes food and energy.
• Smoother; better for identifying trends.

The core measure excludes the most volatile components to reveal underlying producer-price inflation trends.

PPI and monetary policy

The Federal Reserve watches PPI to forecast future CPI and adjust policy preemptively:

• PPI rising sharply: The Fed may raise rates now to prevent inflation from hitting CPI too strongly later.
• PPI flat: The Fed might not tighten, assuming CPI will remain contained.

During 2021-22 tightening, the Fed cited rising PPI as evidence that inflation pressures were building and rate hikes were needed.

Relationship to PCE and CPI

PPI ≠ CPI, but they are correlated. The relationship is:

• Raw materials and energy PPI → Finished goods PPI (with lag)
• Finished goods PPI + retail markup → CPI (with lag)

In high-demand, low-supply conditions, retailer markups widen and CPI can exceed what PPI alone would predict.

COVID and post-COVID PPI

• 2020: PPI fell as demand collapsed; firms cut prices and production.
• 2021: PPI spiked sharply as demand rebounded, supply chains broke, and commodity prices surged.
• 2022: PPI remained elevated but moderated as Fed tightened and demand cooled.
• 2023-24: PPI moderated further, signaling inflation cooling.

The lag between PPI peaks and CPI peaks was notable: PPI peaked mid-2022; CPI peaked a few months later.

See also