Legal Definitions - producer price index

The Producer Price Index (PPI) is a measure of the average change over time in the selling prices received by domestic producers for their output. Issued monthly by the U.S. Bureau of Labor Statistics, the PPI tracks prices from the perspective of the seller, specifically at the first commercial transaction stage. It provides insights into inflation pressures at the wholesale or production level, often before these changes might affect consumer prices.

Here are some examples to illustrate the Producer Price Index:

• Manufacturing Costs: Imagine a large furniture manufacturer that buys lumber, fabric, and metal components from various suppliers. If the cost of high-quality lumber significantly increases due to supply chain issues or higher demand, this rise in the price the lumber mills (producers) receive for their product would be reflected in the Producer Price Index for the lumber industry. The PPI captures this upstream price change, indicating that the cost of producing furniture is likely to rise for the manufacturer, potentially leading to higher prices for retailers later on.

• Agricultural Output: Consider a year where severe drought impacts wheat farms across the country. As a result, farmers (producers) are able to sell their reduced wheat harvest to flour mills and food processing companies at a much higher price per bushel than in previous years. This increase in the price received by the farmers for their wheat would contribute to a rise in the Producer Price Index for agricultural products. It signals that the cost of raw materials for bread, pasta, and other wheat-based goods is increasing at the producer level.

• Energy Sector: Suppose a major power plant that generates electricity from natural gas experiences a sharp increase in the price it pays for natural gas from its suppliers. In turn, the power plant then raises the wholesale price at which it sells electricity to utility companies. This adjustment in the selling price from the power plant (the producer) to the utility companies would be measured by the Producer Price Index for the electricity generation sector. It reflects a change in the cost of energy production before it reaches residential or commercial consumers.