What Is PPI and How to Use It?
Author : Igor Sayadov
Dear Clients and Partners,
One of the previous articles was devoted to the CPI – Consumer Price Index. Today’s article is about its nearest relative – the PPI (Producer Price Index).
What are they different in? What do they show? How to use the PPI in the currency market? This article tries to answer these questions.
Some history
The necessity to track indices appeared as early as the 20th century. In 1925, at the International Conference of Labor Statisticians, certain rules of data collection, processing, generalizing, and presenting were adopted. The importance of such information was acknowledged by all the participants of the conference.
Also, at the Conference, a universal approach to planning and regulating price policies of countries was worked out. Practically, these were the first steps towards globalizing international markets.
The standards created that time were revised three times later: in 1947, 1962, and 1987. In 1962, at the tenth Conference, the term PPI was finally adopted. This is exactly the term used today.
PPI vs CPI
The CPI (Consumer Price Index) is an instrument representing changes for goods and services prices at the final consumer’s side over a certain period. These data is normally used by Central Banks to make interest rate decisions.
When inflation grows, interest rates on loans start being increased in cycles, and when inflation slows down – they start being decreased the same way.
The PPI (Producer Price Index), in turn, reflects changes in goods prices at the wholesale stage, i.e. at the manufacturer’s end. The producer price practically demonstrates the whole range of spending, from buying crude materials through its processing, expenses on energy carriers, expenses on logistics, and to the final product.
As a result, producer prices start changing a bit earlier than at the consumer’s end. This allows calling this index a leading one, signaling about the future inflation level
Where to find the PPI?
PPI values are calculated and published monthly. Every country has a national institution that cares for it.
For example, in the USA, the index is calculated by the Bureau of Labor Statistics, and in Britain – by the Office for National Statistics.
You can find the current, previous, and forecast PPI values in the RoboForex Economic calendar.
How to use the PPI in trading
Take a look at some examples of using the index for trading in the currency market.
Example 1
On September 10th, 2021, the USA published the new PPI value. It turned out to be 8.3% instead of 8.2% expected.
In the USA, the PPI touches upon three sectors: industry, goods and commodities, and recycling.
If the index values exceed expectations, the market goes up (the USD is bullish); if otherwise, the USD becomes bearish.
As a rule, waiting for such news, the market consolidates in narrow ranges. Try using M15 and M30.
Choose the instrument in which it is easier to see the borders of the range, and place pending orders for breakaways of these borders.
For example, let us look at the reaction of the euro to this news. Check the chart below:
A pending selling order for a breakaway of 1.1818 downwards would have brought you a profit at 1.1777. This is the goal of the first wave of decline by the trend.
A pending buying order was to be placed at a breakaway of 1.1855 upwards. But as soon as a selling order is triggered, cancel the buying one.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team
