The Producer Price Index measures the average changes in selling prices producers receive for their products. The PPI includes data from the mining, manufacturing and service industries compiled by the U.S. Bureau of Labor Statistics. The Bureau published its PPI report every month. This publication allows business owners, economists and investors to track the changes in selling prices for specific industries. The method used to calculate PPI is relatively complicated, as it involves measuring changes in price over time.
Factors to Calculate PPI
The PPI calculation requires that the user establish a start date and end date to determine the average price change over a specific time period. The product's selling price at the start date is denoted by P0. The quantity of the product at the start date is denoted by Q0. The product's selling price at the end date is denoted by Pi. Most PPI measurements use 982 as the start date and the current date as the end date.
Method to Calculate PPI
The method used to calculate the PPI involves the formula: PPI = [SUM[(Q0_P0)_(Pi/P0)]/SUM(Q0_P0)] * 100 The "SUM" notation represents the sum of the price data for all the products in a specific industry. The expression "Q0_P0" represents the total sales revenue of a product at the start date. The expression "Pi/P0" represents the ratio of the current price to the price at the start date. The PPI represents the "weighted average" of the changes in price over all the products in the industry.
Example of PPI Calculation
As an example, assume the computer hardware industry has three products: desktops, monitors and printers. Q0 (Desktops) = 2000, P0 (Desktops) = 250, Pi (Desktops) = 500 Q0*P0 (Desktops) = 2000 * 250 = 500,000 Pi/P0 (Desktops) = 500/250 = 2.0
Q0 (Monitors) = 1500, P0 (Monitors) = 150, Pi (Monitors) = 450 Q0*P0 (Monitors) = 1500 * 150 = 225,000 Pi/P0 (Monitors) = 450/150 = 3.0
Q0 (Printers) = 1000, P0 (Printers) = 200, Pi (Printers) = 800 Q0*P0 (Printers) = 1000 * 200 = 200,000 Pi/P0 (Printers) = 800/200 = 4.0
Complete PPI Calculation
When you have calculated your factors for individual products, you add the factors together across the industry to find the PPI.
(Q0_P0) * (Pi/P0) (Desktops) = 500,000 * 2.0 = 1,000,000 (Q0_P0) * (Pi/P0) (Monitors) = 225,000 * 3.0 = 675,000 (Q0*P0) * (Pi/P0) (Printers) = 200,000 * 4.0 = 800,000
PPI = [SUM[(Q0_P0)_(Pi/P0)]/SUM(Q0*P0)] * 100 PPI = [(1,000,000 + 675,000 + 800,000)/(500,000 + 225,000 + 200,000)] * 100 PPI = [2,475,000/975,000] * 100 = 2.538 * 100 = 253.8
The PPI for the computer industry illustrated here is 253.8.