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What can the producer price index tell us about inflation?

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A customer shops at a clothing rack.

The producer price index declined by half a percentage point in July. That's consistent with other measures that suggest an easing of inflation pressures. Emilee Chinn/Getty Images for H&M

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We received surprising economic data from the Labor Department on Thursday: The July producer price index, or PPI, declined from June — by half a percentage point, or 0.5%. Though it doesn’t sound like a big number, analysts had been expecting it to rise 0.2%.

This news comes after the consumer price index, or CPI, showed that prices were basically flat in July. So why worry about PPI?

Acronyms and economic weeds aside, it turns out that the PPI might give you a glimpse into what you’ll be paying for goods and services in the very near future.

The producer price index tracks the change in prices that businesses charge one another for the inputs to products you might buy at a store near you, said Gus Faucher, the chief economist at PNC Financial Services Group.

“If producer prices are going up, that means it’s more likely that consumer prices are going up.”

The market for commodities, especially energy, helps explain why producer prices fell in July for the first time in two years, said Charles Lieberman, chief investment officer at Advisors Capital Management.

“We’ve seen that most commodities had risen quite dramatically,” he said. “They’re lower now, and that will show up in producer prices.”

And they’ll ultimately show up in the prices consumers pay for everything, from food to clothing.

This is all a little personal for Leah Brooks, who teaches public policy at George Washington University. She was — until recently — in the market for a new vehicle.

“My husband and I have two cars. And our older car just died a spectacular death … and just decided it wasn’t going to go anymore,” she said.

With supply chain problems affecting the price of parts, carmakers are paying more, then charging more.

“We really needed a car right now. So we were willing to pay the currently inflated price of cars to buy a new car,” Brooks said.

A consumer who’s less desperate for a particular good or service might not be willing to pay more. So while the producer price index offers useful hints at what’s next for consumers, Brooks said it’s not a perfect forecast.

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