Question

Describe the three main uses of the Producer Price Index (PPI).

Answer 1

Contract adjustment. PPI data are commonly used in adjusting purchase and sales contracts. These contracts typically specify dollar amounts to be paid at some point in the future. It is often desirable to include an adjustment clause that accounts for changes in input prices. For example, a long-term contract for bread may be adjusted for changes in wheat prices by applying the percent change in the PPI for wheat to the contracted price for bread. (See Price Adjustment Guide for Contracting Parties.)
Indicator of overall price movement at the producer level. PPIs capture price movement prior to the retail level. Therefore, they may foreshadow subsequent price changes for business and consumers. The President, Congress, and the Federal Reserve employ these data in formulating fiscal and monetary policies.
Deflator of other economic series. PPIs are used to adjust other time series for price changes and to translate those series into inflation-free dollars. For example, constant-dollar gross domestic product data are estimated using deflators based on the PPI.
Measure of price movement for particular industries and products.
Comparison of input and output costs.
Comparison of industry-based price data to other industry-oriented economic time series.
Forecasting.
LIFO (i.e., last-in, first-out) inventory valuation.