Producer Price Index (PPI)

Producer price index (PPI) is a family of three indices, finished good, intermediate goods and crude commodities or raw materials. PPI measuring price changes received by domestic producers good and services over time from the prospective of seller. PPI data is releases monthly basis all over the world except Australia and New-Zealand, and the government of the country is responsible for it. The calculated domestic products and services PPI is expressing in national currency of that particular country. Foods and energy products are some time exclude from PPI because of its volatile nature.

Measurement of PPI

Index is a measuring tool of movements that simplifies it in numerical values. The index is set to 100 and then movements are measured through a base period. In Most PPIs the base period is set at 1982. the increase and decrease of PPI are denoted in percentage like an index of 110 means there is an increase of 10 percent while and index of 90 means a decrease of 10 percent.

Calculation of PPI

The following formula is using for calculation of Producer price index. It is a modified Laspeyres index which compares the current period revenue of goods with base period revenue of same goods.

In the above formula P_o shows base year commodity price, current year commodity price is denoted by P_i and quantity of commodity sold during the base year is Q_o.

Uses of Producer price index

• The producer price index is able to capture prices up to retail level and then forewarns next price changes for consumers and businesses. The PPI of crude commodities helping economists to forecast future prices of commodities.
• The data released by producer price index is utilizing to formulation of fiscal and monitory polices.
• It allows comparison of different goods on geographic basis, within states, within cities and even countries.
• The PPI allows the comparison of purchasing power of workers at different wage levels.

Initially PPI was just calculated for tangible goods but today, it continues to expand to other non-goods or non-tangible sectors like health, real estate, legal, professional services, business services, finance and construction sector.