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Producer Price Index and the Forex Market

Forex investors base their trade decisions and strategies on both macroeconomic data and technical indicators or charts.  The macroeconomic side of the equation (fundamental analysis) utilizes a variety of indexes that are published on a routine basis (i.e. weekly, monthly), many of which have a direct effect on currency prices.  One index that helps shape and determine currency prices is the Producer Price Index. 

Defining The Producer Price Index

Unlike the Consumer Price Index, which measures price changes at the consumer level, the Producer Price Index is a leading indicator that measures price changes at the producer or wholesale level.  In other words, it foretells price variations that will undoubtedly hit the consumer in the near future (a rather accurate indicator of future CPI changes).  The PPI figures are released either the second or third week of the month for the previous month’s activity. 

Tracking The Price of Goods

The Producer Price Index tracks the price of goods at three different levels of production: crude, intermediate, and finished.  Though all three numbers are important, the finished goods number receives the most attention since that figure is the most closely tied to the final consumer price.  If that number goes up, then that increase will undoubtedly be passed on to the consumer, which can possibly create inflationary pressures and negatively affect currency rates. Likewise, any decreases can be passed on to the consumer, which can then positively (or negatively) affect currency prices as well. 

Here’s a closer look at the three subdivisions of the PPI:

• Crude PPI – Price changes for such items as coal, crude oil, and steel scrap.
• Intermediate PPI – Price changes for goods that are midway through the manufacturing cycle (i.e. lumbar and steel).
• Finished PPI – Price changes for the wholesaler for goods that have been completed and are ready for the end user.

PPI Even Further Defined

To make this index even more valuable, Forex traders and other investors often focus on the core PPI number (the PPI minus food and energy costs).  That’s because these two areas (food and energy) are the most volatile and may not reflect a true overall and long-lasting increase or decrease in prices. 

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