Producer Price Index

Definition      

Is a widely used indicator in industrialized nations; measures the health of the manufacturing and the services sector. The diffusion index is compiled through a survey for purchasing managers covering a wide range of sectors.

The questionnaires cover basically five major indicators new orders, inventory levels, production, supplier deliveries, and employment environment.

The indicator is released in the United Kingdom, Germany, and the Euro Zone as well. Digesting the index generally a reading above 50 resembles expansion and below the marginal 50 level it resembles the opposite with is contraction.

General Effect     

In General, the importance of the Purchasing Manager Index is considered significant, and appears obviously on currencies exchange market, so at the point when this index or any of its components show an increasing value, that will cause a rising of production quantity which is considered a basic factor to achieve required economic growth. Then the effect of this factor supports the country's currency pushing it to appreciate.

On the other hand and as result of this economic growth, inflation factor with time might increase under current economic conditions which accompanies growth, which starts to rise prices levels, which reduces  the major utility of this economic improvement.

In order to confront price stability threats the government starts executing different monetary policies in purpose to stimulate and ensure robust economic growth levels.

The PMI has the same effect on Industrial companies' shares included in the stock market indices.   

Best Case     The service sector is projected to contract further in the UK economy and the best case scenario would be if the contraction is at a lower pace than the projected reading since the service sector accounts for three-fourths of the GDP so a contraction at a lower pace would ease the recession effects.
Worst Case     The worst case scenario would be if the service sector contraction is stronger than the projected reading because this would mean a long and painful recession in the UK since this is one of the major sectors in the economy.