Producer Price Producer Price IndexIndex(PPI)(PPI)

A A Producer Price IndexProducer Price Index ( (PPIPPI) ) measures average changes in prices measures average changes in prices received by domestic producers for received by domestic producers for their output. It is one of several their output. It is one of several price indices.Its importance is being price indices.Its importance is being undermined by the steady decline in undermined by the steady decline in manufactured goods as a share of manufactured goods as a share of spending.spending.

Producer Price IndexProducer Price Index

The PPI looks at three areas of The PPI looks at three areas of production: production:

1.1. Crude Goods - raw materials entering the Crude Goods - raw materials entering the market for the first time.market for the first time.

2.2. Intermediate Goods - commodities that Intermediate Goods - commodities that have undergone transitional processing have undergone transitional processing before becoming the final product. before becoming the final product.

3.3. Finished Goods - goods that are ready for Finished Goods - goods that are ready for the marketplace.the marketplace.

The wholesale price index (WPI)—The wholesale price index (WPI)—currently used to measure changes currently used to measure changes in the average price level at the in the average price level at the wholesale and retail level of wholesale and retail level of transactions in India—would be transactions in India—would be replaced by producer price index replaced by producer price index (PPI) by the next financial year.(PPI) by the next financial year.

WPI measures prices at the wholesale WPI measures prices at the wholesale level and includes certain taxes and level and includes certain taxes and costs. PPI is a measure of what the costs. PPI is a measure of what the producer gets and not what buyer pays, producer gets and not what buyer pays, which includes taxes.which includes taxes.

Together with the retail price indices, it Together with the retail price indices, it gives an idea of margins on different gives an idea of margins on different products and incidence of taxes. It products and incidence of taxes. It indicates the cost pressures in an indicates the cost pressures in an economy.economy.

The PPI tracks price change for The PPI tracks price change for practically the entire output of practically the entire output of domestic goods-producing sectors: domestic goods-producing sectors: agriculture, forestry, fisheries, agriculture, forestry, fisheries, mining, scrap, and manufacturing. mining, scrap, and manufacturing.

PPI tracks the prices of crude goods, PPI tracks the prices of crude goods, intermediate goods, and finished intermediate goods, and finished goods. goods.

Most of the countries have switched over to Most of the countries have switched over to PPI from WPI. In PPI, only basic prices are PPI from WPI. In PPI, only basic prices are used for compilation,while taxes, trade used for compilation,while taxes, trade margins and transport costs are excluded. margins and transport costs are excluded. PPIs, apart from measuring inflation, are PPIs, apart from measuring inflation, are used as deflators in the compilation of GDP. used as deflators in the compilation of GDP. PPI is considered to be a better measure of PPI is considered to be a better measure of inflation as price changes at inflation as price changes at crude and crude and intermediate stages can be tracked before intermediate stages can be tracked before it creeps into the finished goods stage.it creeps into the finished goods stage.

Why is it Important?Why is it Important? PPI is the first major inflationary number that PPI is the first major inflationary number that

comes out during the month. comes out during the month. PPI is the indicator of overall price movement PPI is the indicator of overall price movement

at the producer level. PPI captures price at the producer level. PPI captures price movement prior to the retail level. It may movement prior to the retail level. It may foreshadow subsequent price changes for foreshadow subsequent price changes for business and consumers.business and consumers.

Any sign of inflation here may lead to Any sign of inflation here may lead to inflationary pressures at the retail level. If inflationary pressures at the retail level. If businesses pay more for their goods, they are businesses pay more for their goods, they are more likely to pass along some of their cost to more likely to pass along some of their cost to the consumer. the consumer.

Types of PPITypes of PPI

Primary Producer Price Index Primary Producer Price Index (PPPI)(PPPI)

Secondary Producer Price Index Secondary Producer Price Index Consumer Producer Price Index Consumer Producer Price Index

Keys to Interpreting the Keys to Interpreting the DataData

If you find that there is inflation in If you find that there is inflation in the Finished Goods Index, it may the Finished Goods Index, it may be safe to assume that some of be safe to assume that some of these inflationary cost may these inflationary cost may ultimately be passed on to the ultimately be passed on to the consumer down the road.consumer down the road.

Keys to Interpreting the Keys to Interpreting the DataData

Look at the total Finished Goods Look at the total Finished Goods index to help determine the index to help determine the behavior of consumer prices in the behavior of consumer prices in the long run (6-9 months).long run (6-9 months).

Look at the Core Rate to determine Look at the Core Rate to determine month to month changes in month to month changes in inflation that will serve as a guide inflation that will serve as a guide for anticipating near-term inflation. for anticipating near-term inflation.

Thank You…..Thank You…..