PPI

The Producer Price Index (PPI) measures the change in prices that producers receive for their products on a month by month basis. Data is retrieved using surveys from various sectors including manufacturing, agriculture, mining, and utilities. Like the Consumer Price Index, the PPI compares the current price index to a base value of 100 – this means that a PPI value of 115 is 15% higher than the original base.

Unlike the Retail Sales figures, the PPI does not include taxes or any other shipping or distribution fees typically added as products move through the supply chain. An increase in the PPI index suggests an expanding economy with reasonable assurances of continued employment for those working in the manufacturing sector.

The PPI has a high market relevance and is closely watched as an indicator of current inflation levels. Like other inflation-based indicators, increasing PPI values could signal an interest rate hike intended to combat inflation. A possible interest rate hike may increase demand for the currency as an investment option as investors can expect increased returns as interest rates rise.

The Core PPI excludes volatile items such as energy and food which can distort the PPI figures should there be a sudden spike in oil prices or other unexpected event. You should also note that the PPI report is the first of the inflation-gauging reports available each month so it usually receives close scrutiny as investors look for signs of inflationary pressures that could trigger interest rate changes.

How PPI Affects the Markets

FX Market

Like other inflation-based reports, increasing PPI values could signal an interest rate hike to combat inflation. Interest rate increases can lead to more demand for the local currency but concerns over increasing inflation may outweigh benefits of an interest rate hike so overall, the effect of PPI on local currency is low in comparison to other markets.

Bond Market

Inflationary concerns have a very pronounced effect on fixed income as uncertainty over interest rates may cause investors to move from bonds to markets less vulnerable to an interest rate increase. Generally, you can expect rising PPI numbers to cause a downward pressure on bond prices.

Stock Market

If investors feel that the PPI numbers continue to signal a robust economy with no immediate concern of an interest rate increase, then expect increased activity within the equities market.

Market Relevance

PPI has a high market relevance and because it is usually released before the Consumer Price Index figures, it receives close scrutiny as observers use the PPI as part of their estimates for the CPI results.

When Published

Most jurisdictions publish on a monthly basis.

Volatility

PPI reports have a moderate effect on the markets.