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

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or P P I or pit All right short answer

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People A measure of wholesale inflation You know inflation Pump

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air into a football It gets bigger Keep eating Boston

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

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couple of kinds of inflation will in economics Inflation has

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to do with prices when prices get bigger like bigger

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

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

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inflation Inflation refers to the amount that prices rise over

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a given time Right We index it We categorize it

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We knew Maris eyes It sort of Inflation is a

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

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

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

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

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product like that movie ticket right You go to the

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store to pick up some adult diapers Eso you Khun

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Stream Black mirror without any You know interruptions Been there

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done that this week A pack of those diapers cost

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you twelve fifty Well last month when you were making

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your way through Season five of breaking bad Well a

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pack back then Cost twelve thirty five Two months from

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

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Well you head back to the store and a pack

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of adult diapers is now a twelve sixty So from

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twelve thirty five to twelve fifty two twelve sixty well

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prices are going up up up for adult diapers The

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A D II or adult diaper inflation index is climbing

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fast In just over two months they went up about

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two percent or an annualized inflation rate of around twelve

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

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double every six years Well following one products Inflationary tales

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should be pretty easy But when you try to discern

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inflation rates across an entire economy while things get more

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complicated in a dynamic large complex economy like ours well

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prices on different products move different directions at different times

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Adult diapers might see rising prices but at the same

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time prices for ah you know hemorrhoid cream might be

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dropping Meanwhile prices for stool softeners are holding steady different

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items different inflation trends because different parts of the economy

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can have different price trends While there are different economic

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stats to track separate segments of the economy the Producer

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Price Index is one of these The PP I measures

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a particular kind of inflation Specifically it tracks the changes

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in prices for wholesale goods Hence the catchy title ng

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there with the word produce Sir Price Indexing The first

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Pee there Well the P P I is not about

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prices consumers pay at the store Rather the PP I

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follows prices that companies pay to get the raw materials

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they used to make this stuff that shows up in

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the aisles at Walmart or it Amazons warehouses The pp

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I contrast with the C P I or Consumer Price

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Index which measures the retail price is that you know

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

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some of the stuff that comprises the CP I this

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

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

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Okay You make authentic raccoon skin caps to sell Teo

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War of eighteen twelve reenactors you retail the caps for

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a hundred bucks each Last month you paid an average

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of ten dollars for a raccoon pelt The hundred dollars

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

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what the average Joe pays when he buys it in

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the store Well Meanwhile the ten dollars for the pelt

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represents one of the producer prices you pay You also

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have to pay for string and pelt wax and whale

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oil to run your authentic eighteen twelve era manufacturing facility

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

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just look Att pelt prices for now is a stand

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in for PP I hear this month the price of

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the raccoon pelts goes up to an average of eleven

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

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last month So the raccoon pelt component of your personal

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PP I was up ten percent from last month to

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this month Well the real life P P I is

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made of a day divers basket of wholesale goods energy

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components like crude oil foodstuffs You know like the stuff

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that contains things like weed or rice stuff like that

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

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it You know from various industries Well they all get

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averaged together to create a single measure or a single

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index The U S government releases a monthly report outlining

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changes in the P P I An increase of point

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one percent or point two percent is considered normal Like

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things go up to percent a year something like that

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Anything above that well could indicate rising inflation pressure Right

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

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freak out If one month shows a big move commodities

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and wholesale prices tend to fluctuate quite a bit It

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only starts to matter of big gains Start to pile

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up for a few months in a row So even

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

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represents an important economic measure So pay attention to it

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Your coonskin cap business experience that ten percent rise in

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wholesale prices this month walk the price Then for a

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raccoon pelts rose from ten dollars to eleven dollars So

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you have a decision to make you Khun Pass along

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That cost or expense increased to you to your customer

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increasing your retail price from one hundred bucks a unit

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to one hundred one To cover that increase expensive a

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buck a pelt Or you could just eat the additional

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cost and well live with lower profit margins Usually businesses

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are reluctant to suddenly pass on increased prices to their

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loving customers since commodity markets fluctuate a good deal While

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

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you just kind of forget about it Also retail markets

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are generally competitive The first company to raise prices can

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lose out on shelf space or distribution or customer awareness

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which all Ri leads to a loss of market share

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which would be bad But you went big market share

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

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of pelts selling if you raise your prices and your

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

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to the cheaper brand they get a price advantage because

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

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need to So if you raise your coonskin price is

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one hundred one dollars Cover the rising costs while furry

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tops might swoop in with a sail and grab up

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a bunch of your customers with lost sales would hurt

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

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happened Have you raised prices a dollar to cover yourself

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So you hold steady and you hope the increased producer

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prices or temporary and will you hold your breath with

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

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increased costs forever An upward trend in the PP I

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will eventually find its way to the C P I

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

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FBI and CP I Well the prices for your raccoon

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

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month that rise to eleven twenty five the following eleven

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

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

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

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increase the price to your customers So you raise the

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price for your coonskin caps to one hundred three dollars

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

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in buying raccoon pelts over the last several months But

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prices for pelts are so high that furry tops in

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

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

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same high pel prices you have And similarly the general

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PP I figures eventually feed into higher retail price levels

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

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profits which can impact Stock prices are probably would impact

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

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the producer price index for pp I a measure of

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wholesale inflation complex but still easier to keep track of

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than all those Boston cream pies you ate last month

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as you continue inflating No just just just just just

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