In a speech on 27 June, Swati Dhingra, a member of the committee that sets the Bank Rate, described changes in the producer prices index as ‘one of the best leading indicators of the long-run evolution of prices in this country’ (tinyurl.com/ye2yb5ex). But what is this index that we don’t hear much about?
The US Bureau of Labor defines inflation as: ‘The overall general upward price movement of goods and services in an economy’. That’s alright as far as it goes. In the US, as in most countries, this is generally measured by an increase in an index measuring the price of a basket of consumer goods and services. If the index goes up so many points, that increase is expressed as a percentage of what the index was before and is ‘inflation’.
It is hard to see how an ‘overall upward price movement’ could be measured other than by an increase in some index, but is an index of consumer prices the best way to do this? Consumer goods and services are not the only things that are sold. There are also the goods and services that businesses sell to each other from which to make the final product which consumers buy.
Besides a consumer prices index the Office for National Statistics produces indexes of producer prices. There is an index of ‘input prices’, which covers the prices of materials and intermediate or semi-finished goods that businesses buy from each other to process into final products as well as the price of fuels used in the course of doing this. There is another for ‘output prices.’ Also called ‘factory gate prices’, this is defined as:
‘The amount received by UK producers for the goods that they sell to the domestic market. It includes the margin that businesses make on goods, in addition to costs such as labour, raw materials and energy, as well as interest on loans, site or building maintenance, or rent’.
Producer prices inflation (PPI) is an increase in this index calculated as a percentage. This gives different results for the ‘overall general upward price movement’. Dhingra pointed to
‘a sharp drop in the annual rate of producer price inflation, which was 2.9% in May, its lowest in more than two years and down from a peak of 19.6% in July 2022. Consumer price inflation (CPI), which is targeted by the BoE, peaked at 11.1% in October 2022 and has been slower to fall than the central bank expected, holding at 8.7% in May’.
The index of input prices is a measure of business costs. The difference between the changes in it and changes in the output prices index can be an indication of the income of business out of which its profits come and so also of how profits are doing. The corresponding figures to those quoted by Dhingra were up 0.5% in May, down from a peak of 24.4% in June 2022. Comparing the two suggests that the hit profits took from rising oil prices as an immediate result of the war in Ukraine (when input prices rose more than output prices) is now being overcome (as input prices are rising slower than output prices). Profits are being restored.
From the point of view of analysing how the capitalist economic system works, the factory gate price index is arguably more useful than an index of the price of consumer goods. It is measuring price increases from the seller’s point of view rather than the buyer’s, what they get rather than what we pay. After all, capitalism is a system geared to sellers making a profit, not to meeting consumers’ needs as so often portrayed.
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