What is the Producer Price Index?
The Producer Price Index, or PPI, is similar to the Consumer Price Index but is not related to consumers but to producers. This index will examine the price at which producers purchase their goods, such as raw materials. This is important because if producers' expenses are increasing, they are likely to pass on the extra cost to the consumers. Hence we get inflation.
Why is it important to the Dollar?
The Producer Price Index and inflation tend to go hand in hand. If the PPI increases, inflation will also increase. As a result, the central bank will hike interest rates favourable for the Dollar. A higher PPI figure also indicates strong demand within the economy, attracting investors and investments. A lower PPI may trigger a lower interest rate and indicate declining demand. This will pressure the Dollar.
Why is it important to the US Stocks?
As higher PPI figures result in higher interest rates, a higher PPI can pressure the stock market. The company's cost of debt will increase, and demand may decline due to inflation.
Lower PPIs tend to trigger a positive stock market reaction unless it indicates a possible recession.