Which price index is based on what producers pay for inputs?
Answer (2)
The price index based on what producers pay for their inputs is called the Producer Price Index (PPI). This measures the average change over time in the prices that producers pay for materials, labor, fuel, and other costs needed to make their products.Unlike the Consumer Price Index (CPI), which looks at the prices paid by buyers in stores, the PPI looks at what manufacturers and business owners pay. This index is important because when producer costs go up, businesses often pass these costs on to consumers by increasing their prices. In other words, a rise in the PPI today can lead to a rise in CPI tomorrow.Let’s say a bakery in Manila needs to buy flour, sugar, and cooking gas. If the prices of these ingredients rise, the bakery’s cost of making pandesal goes up. Eventually, they may raise the price per piece of pandesal from ₱2 to ₱3. That’s how producer inflation turns into consumer inflation.Governments and central banks monitor the PPI to get early warnings about inflation. For example, during the pandemic, supply chain problems increased shipping and raw material costs in Asia. These were reflected in rising PPI rates in countries like China and Indonesia, which later affected prices worldwide.Understanding PPI helps students see that inflation doesn’t start at the store—it often begins behind the scenes, where goods are being produced.
The Producer Price Index (PPI) is based on what producers pay for inputs. It measures the average change over time in the selling prices received by domestic producers for their output, reflecting the cost of raw materials, intermediate goods, and other inputs used in production before goods reach consumers.
