The role of Producer Price Index “PPI” in the forex market
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amir - Blog
amirIntroduction :
In recent decades, the Forex market has become one of the most active financial markets in the world. In this dynamic market, detailed analysis of economic information including producer price index (PPI) helps financial decision makers. This research examines the role of PPI in the forex market and examines the effects, analysis, and importance of this parameter.
1- Definition and concept of PPI :
The producer price index is an economic index that measures changes in the prices of industrial products. This index is known as an indicator of inflation and contradictions in the market of goods and services.
Producer Price Index or PPI measures the average selling prices of goods and services at the final location of production. In other words, it is the average price at which the producer sells its products and services to retailers, and the retailers take it to local markets and make it available to the public. In other words, the PPI index shows how much manufacturers spend to produce their products . This index is the inflation indicator at the producer level .
2. Relationship with inflation:
PPI is considered as an indicator of inflation. Changes in the PPI can help analysts predict how changes in producer prices might impact.
Producer price index or PPI shows the average selling prices of goods and services at the final place of production. In other words, it is the average price at which the producer sells its products and services to retailers, and the retailers take it to local markets and make it available to the public.
How is the producer price index calculated?
The producer price index monitors three production sectors: 1- commodity-oriented companies, 2- industrial companies and 3- companies based on the processing stage.
To prepare the PPI index , companies are selected by the Bureau of Statistics and invited to participate in the survey. Once these companies accept the invitation, a field economist contacts the company to arrange for the delivery of information through a questionnaire.
The data is collected on a monthly basis and usually the data collection is finished by Tuesday of the week in which the “13th” day of the month is located. Bureau of Statistics receives approximately 25,000 reports with prices of around 100,000 from various types of goods. If a firm submitted incomplete data, an economist contacted the firm to complete the data. Firms are replaced every 7-8 years on average and replacement firms are selected to sample from that particular industry.
and is calculated by the following formula:
Producer price index = (∑QoPo(Pi/Po)) / (∑QoPo) × 100
- Q O : The amount of goods shipped in the base period
- PO : The price of goods in the base period
- P i : the price of goods in the current period
The above equation clearly shows that commodity items are weighted according to their size and importance. The base price is 100, which is the base year of 1982. PPI is expressed as a percentage increase or decrease compared to the previously published number, which may be monthly, quarterly and annually.
The Producer Price Index (PPI) tracks price changes in almost all producer sectors. These sections are listed below.
- Production mining • Agriculture • Forestry • Fishing
3- Impact on the forex market:
PPI can have a direct impact on the currency market and is considered an important economic statistic. An increase in PPI may somehow indicate an increase in demand for the national currency.
Analysis of PPI changes can help forex traders to predict changes in exchange rates.
PPI can be an important factor in deciding whether to enter or exit Forex trading.
4- Influence on politicians’ decision-making:
PPI information can be used as one of the important factors in determining monetary and economic policies in a country; However, other indicators are also effective.
What is the relationship between inflation and PPI?
The main goal of central banks is to keep inflation usually under 2%, and they believe that if borrowing is cheap for businesses, they can supply their products to consumers in a way that they can afford. and keep the engine of the economy running.
On the contrary, if the inflation is above 3%, the increase in the interest rate will encourage the units to save, because it is more profitable for them to put money in the bank; Therefore, the production decreases and the purchasing power or the desire to buy also decreases among the people.
When prices are increasing, the producer price index stays above the 0% level and this number shows inflation. In today’s economy, experts believe that low and stable inflation can help reduce the severity of a potential economic recession, and this will make businesses stronger.
It is necessary to explain that the change in the interest rate and its increase or decrease is also related to other factors, such as the coronavirus epidemic or the war in Ukraine, as well as the currency war, which causes countries to reduce the value of their currency in order to strengthen their exports. Sorry, determining the interest rate is a complicated topic that is not included in this article.
5- Sensitivity to other indicators:
PPI is also directly linked to other economic indicators, including CPI and GDP.
This index is also directly linked to other economic indicators, including the Consumer Price Index (CPI) and the Gross Domestic Product (GDP).
PPI and CPI variation
Understanding the difference between what the producer price index and the consumer price index shows is a key point. The Consumer Price Index (CPI) indicates the cost with which goods and services are made available to the public. Therefore, CPI is a weighted average measure of the cost price of goods; While the producer price index represents the weighted average selling price of manufactured goods. The CPI represents what the consumer or final customer pays and the PPI represents what the producer receives for his goods. Therefore, producer price is a more primitive or crude form of CPI and there is an inherent correlation between the two. For this reason, PPI is considered an advanced signaling tool for evaluating CPI and making informed economic decisions by various groups.
1. PPI analysis allows traders to trace the chain effects in other sectors of the economy.
2- Using technical analysis to check PPI chart patterns can help traders.
3- Economic announcements can have a direct impact on PPI.
4- PPI can be affected by changes in global markets.
Where can I monitor PPI data?
This data is published directly by the US Bureau of Labor Statistics website. But many other websites also publish them. Almost all forex news websites have an economic calendar section where you can view PPI data. Websites such as fxstreet, Econoday and ForexFactory try to quickly put PPI data on their website. However, we know that these websites log data differences on the website every few seconds. If it is important to you to access the data quickly, it is better to view the data directly from the website of the Department of Labor Statistics at ” Home | US Department of Labor (dol.gov) “.
Conclusion:
PPI analysis in forex is one of the vital tools in categorizing economic information. This research investigated the effects and importance of PPI and showed that a detailed analysis of this index can help traders make successful decisions in the forex market. Paying attention to these points and having a deeper understanding of the effects of PPI can help to successfully navigate the dynamic world of financial transactions.
