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6. Producer Price Index (PPI) : A must know

Course video 36 of 42

This module focuses on key economic indicators that are monitored closely by the finance community. You will learn to examine these economic indicators in the context of business cycles.

Introduction to Financial Markets

Indian School of Business

Cours 1 de 5 dans Financial Markets and Investment Strategy Spécialisation

Learn the general concepts of financial markets and economy. You will see the difference between primary and secondary markets and learn about markets for different products. You will also look at various economic Indicators and their influence on the markets. After completing this course, you will have a much stronger background of financial markets and ready to go to the next stage in the Specialization. This course is designed to help students with very little or no finance background to learn the basics of investments.

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Compétences que vous apprendrez

Bond Market, Financial Markets, Stock Market, Investment

Enseigné par

Vaidya Nathan
Lecturer

Transcription

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Learning Outcomes.

After watching this video, you will be able to understand producer price index.

You will also be able to predict the movements in stock markets,

bond markets and currency markets in response to the consumer price index data.

Producer price index.

Producer price index or PPI is another measure of inflation.

And as you all know, inflation is public enemy number one for financial markets,

because it can wipe the out the value of bond portfolios.

It can depress stock prices and push interest rates higher.

The PPI measures changes in prices, that manufacturers and wholesalers pay for

goods at various stages of production.

Any wave of inflation here could eventually be translated, or

transmitted to the retail level.

Any wave of inflation here could eventually

be transmitted to the retail level.

After all, if businesses have to pay more for goods,

it's pretty likely that they'll pass on some of those higher costs to consumers.

In addition to keeping a close on the PPI, the investment community

looks at a small subset off the PPI known as Core PPI.

A measure that excludes the public categories of food and energy.

Food and energy can be fairly volatile and

these two commodity groups make up 40% of the PPI.

So any abnormal weather pattern or a temporary disruption in oil supplies

can greatly distort the inflation numbers and mislead market analysts.

So to get a more accurate reading of the underlying inflation trend,

the Core PPI is given equal and at times even greater concentration than the PPI.

So what effect does PPI have on stock prices,

on bond prices and currency prices?

Stocks, for the most part, a jump in the PPI means higher production costs for

companies and this can erode profits and endanger dividends.

Although some stock investors argue that a little inflation is a good thing because

it allows producers to charge more for goods, which kind of bolsters revenues.

There is a point during beyond which inflation pressures can

do more harm than good to equities.

So in general a lot of inflation is not very good.

But PPI may not be a very good or

an ideal leading indicator of consumer prices but

you would never know that from the way the bond market reacts to PPI data.

Producer price inflation is one of the hottest

economic indicators released by the government.

Fixed income investors intuitively believe that a jump in PPI can be or

should be wake up call for bond investors.

If the PPI detects rising price pressure in the economy.

It could depress bond prices and force interest rates higher.

No change or an actual decline in producer prices is viewed favorably by

bond holders because it suggests that the absence of any troublesome inflation.

What effect does PPI have on currencies?

A rise in the PPI is a tough call for

participants in the foreign exchange market.

Normally, because it benefits from a little pick up in inflation,

since this kind of profits shot the interest rates higher.

A fast rising inflation report however, can hurt the currency.

A fast rising inflation however,

can hurt the currency because the Central Bank can respond so

aggressively as to jeopardize the country's economic growth altogether.

By and large, a gradual rise in inflation that is accompanied

by a well-timed tightening of monetary policy is likely

to lead to an appreciation of the domestic currency.

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