Producer price index (PPI) reflects the price changes experienced by producers. Index components vary because the stages of the production process involve different goods, including inputs, intermediate goods, and final goods. For example, in a certain country, the index only covers the selling price received by domestic producers for their output. While, in other countries, it may include all the three goods categories.
The index is calculated by dividing current prices by base year prices for the same basket of goods. The result is then multiplied by 100.
From the index, we can measure producer price inflation using the following formula:
Inflation rate = [(PPIt/ PPI(t-1)) – 1] * 100%
The producer price index is considered a predictor of the consumer price index (CPI). Because the index measures price changes at an early stage in the production process. When production costs increase, the increase is usually passed on to consumers, so the prices of consumer goods also go up.
Are the CPI and PPI have the same components? The answer is no. PPI is broader, but it is also simultaneously narrower than CPI. PPI is broader because of encompassing not only consumer products, but also business products such as machinery and parts, industrial chemicals, and so on.
Also, as in the United States, PPI does not cover imported goods. It contrasts with CPI, which include consumer products and services that come from abroad.
Furthermore, PPI also excludes taxes because they do not represent producer revenue. On the other hand, sales tax and other taxes are usually included in the product price paid by consumers, therefore included in the CPI component.