Prices that consumers pay for products and services tend to go up as demand increases. This phenomenon is known as inflation. Many times forex traders see inflation as a sign of a strengthening consumer. Therefore, market participants will pay close attention to economic indicators that attempt to measure inflationary factors. One of the most commonly used inflation-related economic indicators is the Producer Price Index (PPI).
What Does the PPI measure?
The PPI attempts to predict inflationary trends by measuring the change in prices that producers pay for raw materials required to produce the products that eventually make their way to the consumer. The index is weighted with prices paid at the wholesale level and is generally aimed at illustrating trends in the wholesale markets, commodities markets and the manufacturing industry of a specified country or region.
Measure of Inflation
Inflation in the manufacturing and wholesale markets is important because forex market participants see rising producer prices as indicative of demand for goods. Traders may interpret increasing PPI numbers as evidence of a growing economy with continued positive employment trends in manufacturing sectors.
Early Predictor of CPI
Forex traders look to PPI data in order to catch a glimpse of inflationary trends for prices consumers pay for goods and services. In particular, traders will look at the PPI as an early indicator of the Consumer Price Index (CPI). They may speculate that increases in producer prices will put upwards pressure on prices for consumers. If the market demand is strong enough to sustain consumer price increases, many forex traders believe this to be indicative of growing economic strength of the consumer.
Various Versions of PPI
The U.S. PPI is released by the U.S. Bureau of Labor Statistics once per month. However, there are also various versions and derivatives of the PPI which focus on specific aspects of the producer and wholesale markets in the U.S. economy as well as economies of other countries. For instance, the U.S. Core Producer Price Index strips out volatile items, such as food and energy in its calculations. The Canadian equivalent of the U.S. PPI is known as the Industrial Producer Price Index.
On the other hand, no matter which version of the PPI a trader is looking at, it is important to put one’s interpretation of the data in its proper context. Technical factors may contradict the bullish or bearish bias suggested by the PPI or any other economic indicator. Also, unforeseen political events could also surprise the market resulting in significant risk as well as opportunity. Therefore, the PPI should just be one item in various factors affecting a forex trader’s market projections.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.