[MUSIC] 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. [MUSIC]
