Welcome back to our series where we're explaining all the economic data releases that you see in the monthly cycle and how they relate to each other in order to better help you deal with them in the markets. This week we're going to be taking a look at another inflation measure but this time it's the producer price index also known as PPI whereas last week we were talking about the consumer price index CPI and if you're not sure what CPI is or inflation in general then click up here and watch that one first. and then come back to this one.
But if you are sticking around then let's get started. PPI is the Producer Price Index and it's an alternative measure of inflation. It doesn't really catch the mainstream headlines in the same way that CPI and PCE do, but it's still an important release in its own right.
So PPI measures inflation by comparing the average selling prices received by domestic producers for their output. This is one of the reasons it doesn't really carry the same weight as the CPI release, because CPI measures what consumers are actually paying and therefore includes things like sales tax and markups that won't show in PPI. So as an overall gauge of inflation in an economy, those other releases are probably going to give a better picture.
Instead, PPI is measuring the changes in production costs and it covers a number of industries from agriculture to manufacturing. But what does all of this actually mean? Well, since it's measuring price changes earlier in the production stage, it's often used as a gauge for what we may see in the bigger inflation data releases down the line. Because if producers face higher costs, eventually these are likely to be passed on to retailers and then to consumers, which would obviously show as increases in the CPI and PCE releases.
The PPI release is split into three categories. We have the Commodity Index, the Stage of Processing Index and then the Core Reading. And each of these represents different parts of the production chain. So let's say for example the cost of raw materials are increasing, then this would first show up in the Commodity Index.
This is showing the price that producers are paying for goods. And if the cost of raw materials is on the rise, then the Stage of Processing Index, which measures costs in the middle stages of production is also likely to increase. And then at the end we have the core headline figure which measures price changes of finished goods at the end of the production chain.
So these finished goods then head off to retailers and ultimately consumers where the higher prices earlier in the production chain could eventually lead to higher costs of goods. So let's go on to see how CPI relates to other data releases. But first, if you're finding this helpful, I would love it if you would just tap that like button and help us keep doing what we're doing on this channel. I'd really appreciate it. Let's move on.
So we've already seen how price changes in PPI can lead to changes in CPI and PCE. However, it can also be used to filter out the causes of inflation in those releases. For example, if CPI and PCE are on the rise but PPI is relatively stable, then inflation is probably being caused by something other than input costs for retailers. If they both increase at a similar rate, then retailers are likely just maintaining their margins as input costs rise. But if PPI is increasing and CPI and PCE aren't, then someone somewhere is soaking up the cost in the chain.
It could be producers or retailers and this may be a sign that prices are already high. and they're expecting that consumers won't pay any further price increases. So this would likely impact on margins which could result in lower earnings and lower profits for producers and retailers.
In this case they may try to find buyers in export markets but they're likely going to see slower growth in earnings until consumer purchasing power recovers. Now if you want to know about the rest of the economic data releases then check out this playlist here to go through the series so far. and subscribe to the channel so you don't miss when the next ones come out we're going to be covering all of them and linking them all together for you my name is nicholas this is market movers thank you so much for watching take care