The producer price index or PPI is a measure of the prices that manufacturers from a country receive for their output. This is not necessarily the price that consumers pay for the products or services. As a result, PPI measures a specific element of inflation and the factors that contribute to inflation. There are several variants of the producer price index designed to reduce distortions.
Ordinary price indices designed to measure inflation use retail prices, namely what consumers would have to pay in stores. The producer price index is the amount paid by wholesalers or retailers to the manufacturer. Depending on the type of good, this can cut out one or more components of the distribution chain.
Using a producer price index means it is possible to track the actual inflation that affects producers rather than consumers, thus removing several distortions. For example, in some countries where the grocery store business is dominated by a few chains, the bargaining power of the chains can outweigh the effects of consumer inflation. This means that even while retail prices of products such as milk are rising through inflation, the amount received by farmers may rise more slowly, remain steady or even fall.
In the United States, the PPI was formerly known as the Wholesale Price Index until 1978. It had existed under that name for many years and can be traced back to the 19th century. Data for the PPI comes from a representative sample of manufacturers and service providers, collated by the Bureau of Labor Statistics.
Around the world there are several variations on the PPI. For example, the United Kingdom has a core output PPI that exclude output such as food and energy where wholesale prices tend to change very rapidly. Other countries deal with this problem by surveying the prices of such goods more often and averaging them out before adding to monthly figures for other goods. Different countries use a bigger or smaller "basket" of goods to produce the figures: these variations come both from the differing range out output in different countries, and the varying sophistication and resources of the organization compiling the figures.
To some extent, PPI can be a good indicator of likely changes to wider price indexes that measure the cost of living. This is because changes in wholesale prices will, in an otherwise unchanged market, lead to changes in retail prices. This means that although economists can't use PPI as a faultless forecasting tool, it can be an early warning indicator.