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Fundamental Forex Foundations

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Producer Price Index (Core)

Mon, Jul 13 2009, 12:15 GMT
by Tim Salem

FXstreet.com Independent Analyst Team

This Data Point largely measures the Average Change in Sale Prices received by the Domestic Producers of Goods and Services EXCLUDING Food and Energy within the Economy. The Indices that make up The Index measure Prices Changes from the Selling Perspective, and the Data is released approximately Mid-Month after The Coverage Month that the Data analyzes.

Released at approximately 12:30 GMT, The Data is simultaneously released with the Comprehensive PPI Data Point, which includes Food and Energy.

PPI Data reflects the inherent Differences in the Seller’s Costs (PPI) and the Buyer’s Costs (CPI).

These Costs will consistently show Variation due to Distribution Costs, Governmental Activity such as Subsidies, and various Tax Issues between the Producer and the Consumer.

Approximately 10,000 actual Producer Price Indexes are released each month for various Individual Product and Product Groups that make up the Content in the actual PPI Index Itself, and cover literally every Industry within the underlying Economy.

Who is Measured, What is Involved, and How is the Data Collected

A Field Economist will typically visit a Firm when it is selected to participate in a PPI Survey. The Information is held in the strictest Confidence, and to safeguard the Integrity of the Data by Voluntary Cooperation, various Waivers are obtained.

The Field Economist will then use the process of “Disaggregation” to select the specific Goods and Services that the actual Prices will be reported on in the Index.

“Disaggregation” is the Process where Iterative Measures are taken to select Items based on their Proportionate Value compared to the Manufacturer’s Value.

The Process is as follows:

• The Economist breaks down the Items shipped into their own Separate Categories.
• The Categories are then broken down by Price-Determining Characteristics such as Color, Size, Option, and Materials.
• Finally, further Break-Downs will take place in order to find the Differences between the “Types” of Buyers or Discounts, and will continue until a Specific Product that is sold to a Specific Buyer is selected.
• Once Disaggregation is complete, the Firm reports Prices for the selected Products on a Monthly Basis to The Bureau of Labor Statistics. The Firms are to report Prices by the Tuesday of the Week containing the 13th Day of the Month, and each Month approximately 100,000 Prices are collected from about 30,000 Economists/Reporters in the given time.

Areas of Use for the PPI (Core and Comprehensive)

As An Economic Indicator: The Producer Price Index will capture change in Price largely BEFORE they get to the Retail Level. This is considered a “Leading Indicator”, and is one of the Main reasons Traders feel they are so important. By foreshadowing Price Changes to come for Firms as well as Consumers in the “Next Sep” of CPI, the PPI will be used by the Central Bank, Political Head such as a President, and the country’s Congressional Body to formulate Fiscal and Monetary Policies.

As a Currency Deflator: The PPI is used similarly to CPI, in that is it used to “fine tune and adjust” Inflationary Concerns moving forward as a “Bellwether” for Price Fluctuations before they reach the “CPI Levels”. This can “alert” Consumers of coming Price Fluctuations in Time, as the Producer will feel the Impact before the Consumer in that particular Economic Time-Cycle.

As A Currency Adjustment: PPI Data Points are also used to increase and escalate Purchase Contracts and Sales Contracts. These Contracts will usually have specific Dollar Amounts “set” into the Future to maintain the Integrity of doing forward Business with a specific Good or Service. A primary Factor that is involved is a Stipulation for Price Escalation that will account for increases in Input Prices. As an Example, a Long-Term Contract for Beef may be stipulated with changes in Grain Pricing used to feed and raise The Beef itself. By applying the specific Percentage Change in PPI for Grain to the Initial agreed-upon Contract Price for the Beef, “Fair Value” between Producer and Consumer may be achieved.

Trading Ideas

As stated, Traders will keep a Mindful Eye on the PPI Data Point Release, especially Core, as it is such a comprehensive “Bellwether Indicator” of Producer Data and Sentiment of overall Economic Health. Most important is the “Leading Indicator” sentiment of PPI to the CPI Data, as Producers of Goods and Services will often have to pass Price Fluctuations on to the actual Consumer.

CURRENCIES: An Increase in PPI Data will usually affect the underlying Currency in a positive fashion, and will attract Foreign Investment as the Short- Term Rise in Rates make the Currency an attractive Investment. Like many Fundamental Data Point, the “Depth and Level” of this Increase and in what Economic Climate will have an effect as well. Data that is “too Positive too fast” will bring Inflationary Concerns to the forefront, hence calling for Interest Rate Cuts leading to weaker Currency Values.

BONDS: Since PPI really is the Initial Inflationary Data Point to be released each month, The Bond market is, perhaps, the most sensitive to it. “A significant Increase in PPI will lead directly to Inflation” is often on the minds of Bond Traders, as they think Consumer Price Increases are sure to follow. Since the PPI detects a “rising Sentiment” in Prices, it will deflate the Value of Bonds on the whole. PPI coming “In-Line” with Consensus or at a slight Decline will give The Bond Market a boost, since Inflationary Concerns are “In-Check”.

EQUITIES: A deep Increase in PPI Readings, especially the Core PPI, will signify ever-increasing Production Costs. This will cut into any “Bottom Lines of Profit and also Depreciate the Company or Firm’s underlying Stock Price. A significant Decrease in PPI is largely “debatable”, as while Production Costs may be lower for the Producer, Prices and Profits may still consolidate due to “Future” Views in the CPI and a decrease in the Customer base.

Traders may take Cues for working with The Release from the ”Disconnect” between Consensus and the actual reported Data, as well as if the underlying Economy is in a Cycle of Expansion or Contraction. The Macro-Economics will come into View, and be reflected in the actual Outlay Costs of the Producers to get their Gods and Services to market for Consumers. The underlying Currency will respond to this “Disconnect” or “Connect” immediately after The Release., since the Prices the Producer has to pay will lead directly to a higher or lower CPI in many instances. Traders than are hyper-sensitive to seeing the PPI as a “Leading Indicator” of Sentiment.

12 Months Percent Change

Series Id: WPUSOP3000

Not Seasonally Adjusted

Group: Stage of processing

Item: Finished goods

Base Date: 198200

P: Preliminary. All indexes are subject to revision four months after original publication.

12 Months Percent Change - CORE

Series Id: WPUSOP3500

Not Seasonally Adjusted

Group: Stage of processing

Item: Finished goods less food and energy

Base Date: 198200

P: Preliminary. All indexes are subject to revision four months after original publication.

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Published on  Mon, Jul 13 2009, 13:53 GMT