PPI (Producer Price Index)

The Producer Price Index (PPI) measures the average change in the price of a basket of representative goods and services sold by manufacturers and producers in the wholesale market (this is why it was known in the U.S. as the Wholesale Price Index up to 1978).

It is one of the oldest continuous statistics published by the Bureau of Labor Statistics; it is released monthly. There is also core PPI which excluded high volatility items, such as energy. In contrast to the CPI, which measures price changes from the consumers’ perspective, the PPI measures them from the seller’s perspective.

PPI and Gold

Given that the PPI is an index of prices at the producer, not consumer level, one could say that this indicator is irrelevant since the Fed is concerned with price stability understood as stable prices for consumers. This is true, but the PPI is closely watched by the U.S. central bank and the investors in order to predict the CPI, which is released a few days after the PPI. Let’s examine the relationship between producer price inflation and gold’s performance.

Chart 1: The Producer Price Index (red line, left axis), the Consumer Price Index (green line, left axis) and the price of gold (yellow line, right axis, London P.M. fix) from 1971 to 2015.

Producer Price Index and gold price

The chart above shows a much stronger relationship between the PPI and the yellow metal than is the case for the CPI (we may thus say that the gold is an inflation hedge when inflation is measured by the PPI). This makes perfect sense, given the fact that the PPI is the leading indicator of the CPI, and it is also more sensitive to the business cycle, as it tracks price changes at the wholesale level. The annual percent changes in the PPI are quite volatile, but in the long-term this indicator has moved in the opposite direction to the price of gold. Generally, the inflation rate of producer prices was rising in the 1970s and 2000s, and declining in the 1980s, 1990s, and 2010s. Rohan Christie-David et al. confirmed in “Do Macroeconomic News Releases Affect Gold and Silver Prices” that the PPI announcements have significant effects on gold. In other words, the PPI seems to have a stronger relationship with gold than the CPI or PCE Price Index, partially due its sensitivity to the business cycle and partially due to the fact that it is released earliest. Therefore, investors who believe that gold trading is generally about inflation (which is true only sometimes) may take advantage of the short-term gold trading opportunities related to the PPI releases.

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