The Producer Price Index, or PPI, is an important report, but it doesn’t usually move the markets to the same degree as the Consumer Price Index (CPI) and the employment report.
The PPI measures prices at the producer level. In other words, it’s a measurement of the cost of raw materials to companies that produce goods. The market is interested in two things contained in this report:
How fast these prices are rising: If a rise in PPI is significantly large in comparison to previous months, the market checks to see where it’s coming from.
For example, the May 2005 PPI report pegged prices at the producer level as rising 0.6 percent in April, following a 0.7-percent increase in March and a 0.4-percent hike in February. At first glance, the market viewed the April increase (compared to the previous two months) as a negative number. However, market makers discovered a note deeper in the report, indicating that if you didn’t measure food and energy — in this case (especially) oil prices — producer prices at the so-called core level rose only 0.1 percent. The market looked at the core level, and bonds rallied.
You know that food and energy are important expenses, and that if they are more expensive, you pay more. But futures traders live in a different world when they’re in the trading pits and in front of their trading screens, meaning they trade on their perceptions of the data and not what you find intuitive.
Whether producers are passing along any price hikes to their consumers: If prices at the core level are tame, traders will conduct business based on the information they have in hand at least until the CPI is released — usually one or two days after the PPI is released. In this case, based only on the PPI, inflation at the core producer level was tame, so traders wagered that producers were not passing any added costs on to the consumer.