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Econ: What is the Producer Price Index (PPI)? 3 Views


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What is the Producer Price Index (PPI)? The Producer Price Index is a composite of thousands of price indexes from sellers of of goods and services within the US. The three sectors which comprise the PPI are: commodity based, industry based, and the wholesale index, renamed in the late 1970s as commodity based, final demand-intermediate demand.

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Transcript

00:00

And finance Allah shmoop What is the producer's price index

00:06

or P P I or pit All right short answer

00:10

People A measure of wholesale inflation You know inflation Pump

00:15

air into a football It gets bigger Keep eating Boston

00:18

cream pies and well you'll get bigger Yep those air

00:20

couple of kinds of inflation will in economics Inflation has

00:24

to do with prices when prices get bigger like bigger

00:27

numbers That's inflation A couple of years ago a movie

00:30

ticket cost ten bucks Now it's like twelve fifty That's

00:33

inflation Inflation refers to the amount that prices rise over

00:37

a given time Right We index it We categorize it

00:40

We knew Maris eyes It sort of Inflation is a

00:43

key driver of the pp I At least that's what

00:45

it's measuring But people measures inflation in a specific part

00:49

of the economy See it's relatively easy to see how

00:52

much prices are increasing When you're talking about a single

00:54

product like that movie ticket right You go to the

00:57

store to pick up some adult diapers Eso you Khun

00:59

Stream Black mirror without any You know interruptions Been there

01:03

done that this week A pack of those diapers cost

01:05

you twelve fifty Well last month when you were making

01:08

your way through Season five of breaking bad Well a

01:11

pack back then Cost twelve thirty five Two months from

01:14

now when you're heavy into orange is the new black

01:17

Well you head back to the store and a pack

01:20

of adult diapers is now a twelve sixty So from

01:23

twelve thirty five to twelve fifty two twelve sixty well

01:26

prices are going up up up for adult diapers The

01:29

A D II or adult diaper inflation index is climbing

01:33

fast In just over two months they went up about

01:35

two percent or an annualized inflation rate of around twelve

01:39

percent That's monstrous people means prices at that rate would

01:42

double every six years Well following one products Inflationary tales

01:46

should be pretty easy But when you try to discern

01:49

inflation rates across an entire economy while things get more

01:52

complicated in a dynamic large complex economy like ours well

01:56

prices on different products move different directions at different times

02:00

Adult diapers might see rising prices but at the same

02:03

time prices for ah you know hemorrhoid cream might be

02:06

dropping Meanwhile prices for stool softeners are holding steady different

02:12

items different inflation trends because different parts of the economy

02:15

can have different price trends While there are different economic

02:19

stats to track separate segments of the economy the Producer

02:24

Price Index is one of these The PP I measures

02:26

a particular kind of inflation Specifically it tracks the changes

02:29

in prices for wholesale goods Hence the catchy title ng

02:33

there with the word produce Sir Price Indexing The first

02:36

Pee there Well the P P I is not about

02:38

prices consumers pay at the store Rather the PP I

02:41

follows prices that companies pay to get the raw materials

02:44

they used to make this stuff that shows up in

02:46

the aisles at Walmart or it Amazons warehouses The pp

02:49

I contrast with the C P I or Consumer Price

02:53

Index which measures the retail price is that you know

02:56

the regular Joe consumer pays well Here's a list of

02:59

some of the stuff that comprises the CP I this

03:02

stuff And here's a list of some of the stuff

03:04

that comprises the See Threepio Yeah it's different way digressed

03:08

Okay You make authentic raccoon skin caps to sell Teo

03:11

War of eighteen twelve reenactors you retail the caps for

03:15

a hundred bucks each Last month you paid an average

03:17

of ten dollars for a raccoon pelt The hundred dollars

03:20

retail price represents the consumer price for the cap That's

03:24

what the average Joe pays when he buys it in

03:26

the store Well Meanwhile the ten dollars for the pelt

03:28

represents one of the producer prices you pay You also

03:31

have to pay for string and pelt wax and whale

03:34

oil to run your authentic eighteen twelve era manufacturing facility

03:39

with looms and things But to keep it simple we'll

03:41

just look Att pelt prices for now is a stand

03:44

in for PP I hear this month the price of

03:46

the raccoon pelts goes up to an average of eleven

03:48

dollars each That's ten percent higher from where they were

03:51

last month So the raccoon pelt component of your personal

03:54

PP I was up ten percent from last month to

03:58

this month Well the real life P P I is

04:00

made of a day divers basket of wholesale goods energy

04:03

components like crude oil foodstuffs You know like the stuff

04:07

that contains things like weed or rice stuff like that

04:10

That's a foodstuff and other components that are included in

04:13

it You know from various industries Well they all get

04:15

averaged together to create a single measure or a single

04:18

index The U S government releases a monthly report outlining

04:21

changes in the P P I An increase of point

04:23

one percent or point two percent is considered normal Like

04:27

things go up to percent a year something like that

04:29

Anything above that well could indicate rising inflation pressure Right

04:33

Like prices are about to take off But people don't

04:35

freak out If one month shows a big move commodities

04:37

and wholesale prices tend to fluctuate quite a bit It

04:40

only starts to matter of big gains Start to pile

04:42

up for a few months in a row So even

04:44

though it doesn't measure direct consumer prices the PP I

04:47

represents an important economic measure So pay attention to it

04:51

Your coonskin cap business experience that ten percent rise in

04:54

wholesale prices this month walk the price Then for a

04:57

raccoon pelts rose from ten dollars to eleven dollars So

05:01

you have a decision to make you Khun Pass along

05:03

That cost or expense increased to you to your customer

05:07

increasing your retail price from one hundred bucks a unit

05:10

to one hundred one To cover that increase expensive a

05:12

buck a pelt Or you could just eat the additional

05:15

cost and well live with lower profit margins Usually businesses

05:19

are reluctant to suddenly pass on increased prices to their

05:22

loving customers since commodity markets fluctuate a good deal While

05:25

this month's cost increase can disappear next month and then

05:29

you just kind of forget about it Also retail markets

05:31

are generally competitive The first company to raise prices can

05:35

lose out on shelf space or distribution or customer awareness

05:39

which all Ri leads to a loss of market share

05:41

which would be bad But you went big market share

05:43

If you're going to be the king of the queen

05:45

of pelts selling if you raise your prices and your

05:48

competition doesn't follow suit while customers are going to flock

05:51

to the cheaper brand they get a price advantage because

05:53

well you panicked and raised prices and you really didn't

05:56

need to So if you raise your coonskin price is

05:58

one hundred one dollars Cover the rising costs while furry

06:01

tops might swoop in with a sail and grab up

06:04

a bunch of your customers with lost sales would hurt

06:07

more than a slight dip in profit margins That would've

06:10

happened Have you raised prices a dollar to cover yourself

06:12

So you hold steady and you hope the increased producer

06:14

prices or temporary and will you hold your breath with

06:17

a big oxygen bottle there However a company can't eat

06:20

increased costs forever An upward trend in the PP I

06:23

will eventually find its way to the C P I

06:26

and people is very important There's a lag between the

06:29

FBI and CP I Well the prices for your raccoon

06:31

pelts continue to rise It's eleven bucks this month Next

06:34

month that rise to eleven twenty five the following eleven

06:37

thirty five and six months down the road It's thirteen

06:40

dollars Yeah that's a thirteen bucks Well at that point

06:42

you can't take the expense increases anymore You have to

06:45

increase the price to your customers So you raise the

06:48

price for your coonskin caps to one hundred three dollars

06:51

making up for the three dollar price increase you've suffered

06:54

in buying raccoon pelts over the last several months But

06:56

prices for pelts are so high that furry tops in

06:59

can't swoop in Now with lower prices they have to

07:02

increase prices too because well they've been squeezed with the

07:05

same high pel prices you have And similarly the general

07:09

PP I figures eventually feed into higher retail price levels

07:12

If they don't hire PP I figures eat into corporate

07:15

profits which can impact Stock prices are probably would impact

07:18

stock prices and eventually the overall economy So yeah that's

07:21

the producer price index for pp I a measure of

07:24

wholesale inflation complex but still easier to keep track of

07:29

than all those Boston cream pies you ate last month

07:31

as you continue inflating No just just just just just

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