How to read the US PPI report

What the PPI measures

The PPI is published monthly by the Bureau of Labor Statistics (BLS), usually at 8:30 AM ET. It measures the average change in selling prices received by domestic producers. The CPI looks at prices from the buyer's side, and the PPI looks at them from the seller's side.

Because it covers what businesses charge each other and the public, the PPI includes items the CPI leaves out, such as some services bought by companies or paid for by government programs. That difference explains why the two reports do not always move together.

• Release: monthly, 8:30 AM ET, from the BLS
• Viewpoint: prices received by sellers
• Coverage: goods, services and construction
• Prior months are revised, so check the revisions as well as the new figure

Final demand and the core measures

The headline number is PPI final demand. It covers goods, services and construction sold to final users, including consumers, businesses buying capital equipment, government and exports.

The BLS also publishes core measures. One excludes food and energy, which swing sharply with weather and commodity markets. Another excludes food, energy and trade services. Trade services capture the margins that wholesalers and retailers earn, and those margins can jump or fall in a single month without saying much about underlying inflation. Many analysts treat the measure without food, energy and trade as the steadiest read.

• Final demand: the headline index
• Final demand less food and energy: a common core view
• Final demand less food, energy and trade services: strips out volatile margins
• Month-over-month change shows recent pressure; year-over-year change shows the trend

What PPI can and cannot tell you

Rising producer prices can signal cost pressure that may later reach consumers. A firm paying more for inputs may pass some of that on, absorb it in its margins, or offset it elsewhere. The PPI alone does not tell you which of these will happen.

The link from PPI to consumer inflation is loose and changes over time. Goods prices pass through more visibly than services, and energy can dominate the headline in any given month. Treat PPI as one input about the pipeline of price pressure, and compare it with the CPI, wage data and company commentary before drawing a conclusion.

The PPI parts that feed into PCE

The Federal Reserve's 2% inflation target is defined using the personal consumption expenditures (PCE) price index, published later in the month by the Bureau of Economic Analysis. PCE borrows some components directly from the PPI where the CPI does not fully capture a cost.

Once both CPI and PPI are out, economists combine the relevant pieces to estimate core PCE before its official release. For this reason, traders sometimes pay more attention to a few PPI lines than to the headline. A headline that looks hot or cool can mislead if these components point the other way.

• Health care services, such as physician and hospital care
• Portfolio management and investment advice fees, which track asset prices
• Airline passenger services

How markets compare PPI with expectations

Before each release, economists publish forecasts, and the median is called the consensus. Markets react mainly to the gap between the actual figure and that consensus, rather than to the level itself.

When PPI has come in hotter than expected, Treasury yields and the dollar have tended to rise and rate-sensitive stocks have tended to come under pressure, as traders weigh a less easy Fed. Cooler readings have tended to do the reverse. Exceptions are common. PPI often draws a smaller reaction than CPI, and the timing matters: if CPI came out first, much of the inflation picture may already be priced in, and attention shifts to the PCE-related components.

• Compare headline and core with their consensus forecasts
• Check whether prior months were revised up or down
• Note whether CPI was released before or after PPI this month
• Watch how the market reads the PCE estimate updates that follow

Key terms

Producer price index (PPI)

A BLS measure of the average change in selling prices received by domestic producers for their goods and services.

Final demand

The headline PPI index covering goods, services and construction sold to final users.

Core PPI

PPI measures that exclude volatile categories, usually food and energy, and sometimes trade services as well.

Trade services

The margins wholesalers and retailers earn, measured as the gap between what they pay for goods and what they sell them for.

PCE price index

The Bureau of Economic Analysis inflation measure that the Fed uses for its 2% target.

Consensus

The median forecast of economists for a data release, used as the benchmark for surprises.

Revision

An update to previously published data as the BLS receives more complete information.