PPI - Producer Price Index

Why is it important?

It measures changes in the selling prices producers charge for goods and services that they provide to the consumers, it also traces down how the prices relate to the production costs and processes. Producers tend to pass on higher costs to consumers in the form of higher retail prices; the PPI is valuable as an early indicator of inflation. The report also gives insight into how higher prices from raw materials flow toward the end product. It is important to note that The PPI is an output index that measures price changes from manufacturers of a product. The PPIs are used as an aspect of output for the seller and as a cost factor for the buyer. The prices collected in a particular period should refer to orders booked during the same period (moment of order) and not the moment when the commodities leave the factory gates. This ensures that producers do not charge exceptionally high prices at the expense of the consumers. It therefore plays a very important role in regulation of market consumer prices. It is also a leading factor in influencing the introduction of new companies into the economy. If the PPI is well managed and the manufacturers feel the investment climate is conducive, they are likely to set up plants in the country. If they feel that the price index is not reflective of the conditions on the ground, they have a forum to express their issues. In simple terms, this index can be a strong determinant on whether or not a company invests in the economy.

How is it computed?

Producer price index is a business-cycle indicator showing the development of transaction prices of economic activities. It is computed by gathering all the details on the orders of manufacturing product as well as the cost of production, which may include costs of labor, energy, raw materials, cost of rental structure as well as transportation among other minor expenses. This information is then used in working out a viable price range that will ensure both the producer and consumer’s interests are put into account in order to strike a balance in trade. It is worth noting that the PPI records prices at various stages of production: raw goods, intermediate goods and finished goods. However, intermediate and crude goods price do provide insight for future inflationary pressure. Because the prices of finished goods generates most interest for market participants the PPI helps sort out any discrepancies before they reach the point of sale to the consumer

How does it affect the forex trade?

Although the producer price index is not a major factor in determining the rates at the forex market it has a major role to play I as far as inflation is concerned. It is therefore right to state that the PPI checks and controls inflationary trends to ensure that the dollar does not become too valueless. Inflation has very negative influence in the value of any currency. If the local currency is rendered valueless due to imbalance created out of the state’s inability to properly gauge the prices of commodities in relation to the costs of producing the same, then the currency’s demand in the forex trade drops significantly

Any change in producer pricing may affect the performance of a commodity to the negative or positive depending on the direction of the change. If the consumer market feels that the change in the producer pricing is not commensurate to the production cost, they may opt to shun the product in favor of other seemingly well-priced commodities. It should be notable that if the preferred commodity is an imported product it is likely to impact negatively to the forex rate of the local currency. A factor to think about when looking at this subject is the high influx of foreign produced goods especially from the eastern states like china where the production costs are at their lowest. This trend sees their currency gain more value against the dollar. Investors who are keen enough to trace the root course of the high producer prices to an issue that is irreversible may as well opt to withdraw their companies and to go and set them up in regions that would guarantee them better profit margins. Such a move would directly deny the country a lot of revenue and even lead to a decline in the GDP due to job lay offs.

What is its impact on the stock market?

Just as it does not directly influence the forex rates directly, the same applies in the case of the stock market. It will generally influence the setting up of manufacturing plants in the state. If the index is quite indicative of the true market situation on the ground, investors will be able to compete fairly with other companies producing internationally. This status will mean an increase in investment demand into the local economy. It is needless to state that a high demand in investment opportunities into the local economy will lead to an increase in share price basing on the demand versus supply principles.

The producer price index should play an important role in the attraction and maintenance of investments in the economy. This factor translates into what may be referred to as a conductive investment environment. When this indices reflect good trends, investors have no choice but to exploit the existing conditions, likewise if they fail to reflect the desired trends, the same investors may be forced to seek greener pastures else where. Maintaining these indices at their most conducive points should therefore be a leading priority for any state that hopes to continue attracting investment. High investment rates are directly proportional to the stock market performance. The two therefore directly influence each other.

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