The producer price index for finished goods is the most widely quoted of the various indexes, but as financial market participants become more sophisticated, they have turned to the earlier stages of processing-intermediate goods and crude materials-as predictors for the finished goods index which is the final stage of processing.

Importance
The producer price index for finished goods is a major indicator of commodity prices in the manufacturing sector. These prices are more sensitive to supply and demand pressures than the more comprehensive consumer price index. Producer price changes are considered a leading indicator for consumer price changes.

Interpretation
The bond market will rally when the PPI decreases or posts only small increases, but bond prices will fall when the PPI post larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

Changes in the producer price index for finished goods are considered a precursor of consumer price inflation. If the prices that manufacturers pay for their raw materials rise, they would have to raise the prices that consumers pay for their finished goods in order to not decrease profit margins. Changes in the supply and demand for labor will affect wage changes with a delay because wages are institutionalized and contractual. However, commodity prices react more quickly to changes in supply and demand.

Commodity prices vary from month to month, but food and energy prices-which make up nearly one-quarter of the PPI-are the major source of the volatility. Due to sharp movements in these two components, market players and economists have become accustomed to monitoring the PPI excluding food and energy. In shorthand, this is also referred to as the "core" PPI. (In reality, what can be more "core" than food and gasoline to consumers?)

The PPI for finished goods gets the most attention, but market players have turned to the PPI for intermediate materials and crude materials for early indications of inflation. The earlier the stage of processing, the more volatile the index.

Frequency
Monthly.

Source
Bureau of Labor Statistics, U.S. Department of Labor.

Availability
Usually the second week of the month.

Coverarge
Data are for the previous month. (Data for June are released in July.)

Revisions
Monthly, data for the third month previous are revised based on more complete information. Annually, new seasonal adjustment factors are introduced in February with the release of January data. This revision affects the last five years of data. The magnitude of revisions is small.