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How an Increase in the Producer Price Index Affects the Economy

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Producer Price Index

The US Bureau of Labor Statistics (or BLS) releases a monthly report that tracks the price trends in the wholesale markets. This report contains data from all industries in the US that manufacture (XLI) goods. 

All this data is used to construct the Producer Price Index (or PPI), which is a weighted average index of prices at the wholesale level. The PPI measures the changes to prices at the raw material procurement, production, and finished goods stages of the manufacturing process.

The October PPI rose 0.4% month-over-month, and it was unchanged compared to the September reading. On a year-over-year basis, the index has risen 2.8%, up from 2.6% in September.

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Why should we track the Producer Price Index?

Investors in equity markets (SPY) who are invested in manufacturing or any other sectors covered by the PPI can gain key insights from this PPI report. The Producer Price Index can be considered a leading indicator of inflation (TIP)

If prices increase at the wholesale level, these price increases are usually passed on to consumers, resulting in higher prices of goods. Profit margins of manufacturing companies (ITA) depend on the demand elasticity of their products which, in turn, could impact stock prices.

What to make of the October PPI report

The October PPI report indicated that producer prices increased in every sector covered by the index. According to the BLS PPI report, goods prices rose 0.3%, services prices increased 0.5%, food prices rose 0.5%, and energy (XLE) prices remained unchanged. The Core PPI, which excludes volatile food and energy prices, rose 0.4% in October.

Analyzing the PPI report, we can assume that the trend of rising prices could persist. This trend indicates that inflation could move toward the Fed’s 2% target in the coming months. The Fed could be encouraged by this trend in prices and could remain committed to gradual rate hikes.

In the next part of this series, we’ll analyze the changes in the Consumer Price Index in October.

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