Defining Producer Price Index (PPI) for Forex Traders

The Producer Price Index (PPI) tracks prices at the first stage of distribution or at the point of the first commercial transaction.

PPI is an important indicator which online traders use to make informed decisions in the forex trading markets.

The producer price index PPI indicator is designed primarily to gauge the level of price stability in the economy. PPI represents the average movement in selling prices from domestic production over time. Its particularly relevant now as a measure of inflation based in input costs to producers. Therefore, some investors view it as an early sign of inflation compared to consumer price index (CPI). It’s published by the Bureau of Labour Statistics, which is a unit of the United States Department of Labour.

Reported in the second or third week of the month, the producer price index (PPI), very simply, is an indicator that measures any price changes from the company side of the equation. PPI includes many sub-indexes which make up the headline number. This increases the importance of the release as it allows market participants to get a look at what is happening not only with overall producer prices, but also producer prices by industry. There are approximately 10 000 sub-indexes, at specific weightings, used to compile the figure and released with the report. Important to note is that it sheds light on all product type and industry that make up the US economy.

Prices are tracked in various stages, but it is at a finished goods level that most interest investors. It is this number which ultimately the determinant of inflationary or non-inflationary pressures in the economy. The PPI measures the cost of production and as such reveals cost pressures affecting production.

Lastly the Federal Reserve Bank and other market participants often focus on the core number which is PPI minus food and energy as these components are often highly volatile in the short term.

As PPI provides insight into what is happening with price, the ultimate tell-tale sign that the economy is under pressure is how much the consumer is paying. More on this later when we cover our next topic represented by the consumer price index (CPI).

 

How to use Producer Price Index in FX Trading

Traders focus on percentage changes. They distinguish between the level of prices and the rate of increase. If the rate of increase declines but remains positive, prices are still increasing

Forex traders can use PPI as a leading indicator to forecast consumer inflation measured by the Consumer Price Index (CPI).

Traders keep an eye on PPI in forex trading because of the positive correlation between inflation and interest rates, but ultimately, traders are concerned about how interest rate fluctuations would affect currency pairs.

If PPI is on the rise it may result in the upward trend of interest rates. When interest rates go up, saving money due to the higher return looks more attractive to investors. Therefore, consumers forego spending money as the seek the opportunity of greater returns. This results into potential increased rates and possibly a stronger currency.

For example, high interest rates attract foreign financial flows and forex traders know how to exploit their pursuit of higher yields.

Smart traders can predict the impact of PPI on CPI and interest rates and trade appropriately. As a result, the signalling effect that PPI data gives to the market is the most valuable aspect of it.

 

More Information on the Producer Price Index

To stay up-to- date with the producer price index release please visit: https://www.forexfactory.com/calendar

By clicking on the folder as indicated below, you find all the relevant data to PPI.