Before we look at the PPI, it is often the Consumer Price Index (CPI) that is the most frequently cited measure of inflation. This metric measures the price change of a basket of goods and services from the perspective of the consumer. Often overlooked, the Producer Price Index (PPI) can also be utilized to assess the rate of change in prices. According the Bureau of Labor Statistics (BLS), the government body that collects PPI data and releases it on a monthly basis, the PPI "measures the average change over time in the selling prices received by domestic producers for their output."

The PPI is somewhat similar to the CPI with the exception that it looks at rising prices from the perspective of the producer rather than the consumer. While the CPI looks at final prices realized by consumers, the PPI takes one step back and determines the change in output prices faced by producers. The discrepancies between the two prices are based on factors such as sales taxes and markups as products move through the various stages of the supply chain.

Inflation is probably the second-most watched indicator after unemployment data, as it helps investors deduce the future direction of monetary policy. The core PPI can serve multiple roles in improving investment-making decisions because it can serve as a leading indicator for CPI. When producers are faced with input inflation, those rising costs are passed along to the retailers and eventually to the consumer.

Furthermore, PPI presents the inflation picture from a different perspective than CPI. Although changes in consumer prices are important for consumers, tracking PPI allows one to determine the cause of the changes in CPI. If, for example, CPI increases at a much faster rate than PPI, such a situation could indicate that factors other than inflation may be causing retailers to increase their prices. However, if CPI and PPI increase in tandem, retailers may be simply attempting to maintain their operating margins.

Economists can also forecast the future movement of the finished goods index by monitoring the intermediate index, and the direction of the intermediate index can be determined by analyzing the crude index. Essentially, the data obtained from monitoring the downhill indicators, those focused on raw materials, can be used to forecast the uphill core indicators. The PPI of finished goods provides a sense of the expected CPI movement. When companies experience higher input costs, those costs are ultimately passed on to the subsequent buyers in the distribution network. These firms will then charge higher prices for final products that are delivered to retail locations. Although firms throughout the supply chain will typically hedge their input costs, higher prices will eventually be realized once the fixed price contracts expire.

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