Relative Purchase Power Parity

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

or P P I or pit All right short answer

People A measure of wholesale inflation You know inflation Pump

air into a football It gets bigger Keep eating Boston

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

couple of kinds of inflation will in economics Inflation has

to do with prices when prices get bigger like bigger

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

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

inflation Inflation refers to the amount that prices rise over

a given time Right We index it We categorize it

We knew Maris eyes It sort of Inflation is a

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

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

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

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

product like that movie ticket right You go to the

store to pick up some adult diapers Eso you Khun

Stream Black mirror without any You know interruptions Been there

done that this week A pack of those diapers cost

you twelve fifty Well last month when you were making

your way through Season five of breaking bad Well a

pack back then Cost twelve thirty five Two months from

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

Well you head back to the store and a pack

of adult diapers is now a twelve sixty So from

twelve thirty five to twelve fifty two twelve sixty well

prices are going up up up for adult diapers The

A D II or adult diaper inflation index is climbing

fast In just over two months they went up about

two percent or an annualized inflation rate of around twelve

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

double every six years Well following one products Inflationary tales

should be pretty easy But when you try to discern

inflation rates across an entire economy while things get more

complicated in a dynamic large complex economy like ours well

prices on different products move different directions at different times

Adult diapers might see rising prices but at the same

time prices for ah you know hemorrhoid cream might be

dropping Meanwhile prices for stool softeners are holding steady different

items different inflation trends because different parts of the economy

can have different price trends While there are different economic

stats to track separate segments of the economy the Producer

Price Index is one of these The PP I measures

a particular kind of inflation Specifically it tracks the changes

in prices for wholesale goods Hence the catchy title ng

there with the word produce Sir Price Indexing The first

Pee there Well the P P I is not about

prices consumers pay at the store Rather the PP I

follows prices that companies pay to get the raw materials

they used to make this stuff that shows up in

the aisles at Walmart or it Amazons warehouses The pp

I contrast with the C P I or Consumer Price

Index which measures the retail price is that you know

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

some of the stuff that comprises the CP I this

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

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

Okay You make authentic raccoon skin caps to sell Teo

War of eighteen twelve reenactors you retail the caps for

a hundred bucks each Last month you paid an average

of ten dollars for a raccoon pelt The hundred dollars

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

what the average Joe pays when he buys it in

the store Well Meanwhile the ten dollars for the pelt

represents one of the producer prices you pay You also

have to pay for string and pelt wax and whale

oil to run your authentic eighteen twelve era manufacturing facility

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

just look Att pelt prices for now is a stand

in for PP I hear this month the price of

the raccoon pelts goes up to an average of eleven

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

last month So the raccoon pelt component of your personal

PP I was up ten percent from last month to

this month Well the real life P P I is

made of a day divers basket of wholesale goods energy

components like crude oil foodstuffs You know like the stuff

that contains things like weed or rice stuff like that

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

it You know from various industries Well they all get

averaged together to create a single measure or a single

index The U S government releases a monthly report outlining

changes in the P P I An increase of point

one percent or point two percent is considered normal Like

things go up to percent a year something like that

Anything above that well could indicate rising inflation pressure Right

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

freak out If one month shows a big move commodities

and wholesale prices tend to fluctuate quite a bit It

only starts to matter of big gains Start to pile

up for a few months in a row So even

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

represents an important economic measure So pay attention to it

Your coonskin cap business experience that ten percent rise in

wholesale prices this month walk the price Then for a

raccoon pelts rose from ten dollars to eleven dollars So

you have a decision to make you Khun Pass along

That cost or expense increased to you to your customer

increasing your retail price from one hundred bucks a unit

to one hundred one To cover that increase expensive a

buck a pelt Or you could just eat the additional

cost and well live with lower profit margins Usually businesses

are reluctant to suddenly pass on increased prices to their

loving customers since commodity markets fluctuate a good deal While

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

you just kind of forget about it Also retail markets

are generally competitive The first company to raise prices can

lose out on shelf space or distribution or customer awareness

which all Ri leads to a loss of market share

which would be bad But you went big market share

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

of pelts selling if you raise your prices and your

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

to the cheaper brand they get a price advantage because

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

need to So if you raise your coonskin price is

one hundred one dollars Cover the rising costs while furry

tops might swoop in with a sail and grab up

a bunch of your customers with lost sales would hurt

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

happened Have you raised prices a dollar to cover yourself

So you hold steady and you hope the increased producer

prices or temporary and will you hold your breath with

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

increased costs forever An upward trend in the PP I

will eventually find its way to the C P I

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

FBI and CP I Well the prices for your raccoon

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

month that rise to eleven twenty five the following eleven

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

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

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

increase the price to your customers So you raise the

price for your coonskin caps to one hundred three dollars

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

in buying raccoon pelts over the last several months But

prices for pelts are so high that furry tops in

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

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

same high pel prices you have And similarly the general

PP I figures eventually feed into higher retail price levels

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

profits which can impact Stock prices are probably would impact

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

the producer price index for pp I a measure of

wholesale inflation complex but still easier to keep track of

than all those Boston cream pies you ate last month

as you continue inflating No just just just just just