Question

How does Producer Price Index effect producers of goods and therefore can have significant impacts to consumers?

Answer 1

Producer price index is defined as the average changes in prices which the domestic producers receive for their output. It simply means how much variation is there in the output prices which the producers manufacture by way of inputs.

This index is what drives the producers, as they base their business in terms of how much selling price are they going to receive on their output. If the index varies a lot, it will affect the producers by way of highly volatile scenarios which are not sustainable, such as oil fluctuating a lot. This will also prove harmful for consumers as they will opt for substitute products which are much less volatile and cheap.

If the index is high, then producers would like to gain from this and produce more of the products, wherein consumers pay a higher value.

If the index is low, then producers reduce their quantity supplied and consumers buy more of such products as they are cheap, to meet this demand eventually producers will have to produce more.