3 Important Financial Indices

Here are three important financial indicators that can help you gauge the current economical environment.

3 Important Financial Indixes

3 Important Financial Indixes photo by nationalassemblyforwales

1. Real GDP (Gross Domestic Product)

What is it?

The real GDP is the market value of all goods and services produced in a nation during a specific time period. Real GDP measures a society’s wealth by indicating how fast profits may grow and the expected return on capital. It is labeled “real” because each year’s data is adjusted to account for changes in year-to-year prices. The real GDP is a comprehensive way to gauge the health and well-being of an economy.

Why is it important?

The Federal Reserve uses data such as the real GDP and other related economic indicators to adjust its monetary policy.

Where does the data come from?

The U.S. Department of Commerce’s Bureau of Economic Analysis releases the data quarterly, including any revisions, within the last week to 10 days of each month following the end of the quarter. Data are spelled out as being “advance estimates,” “preliminary estimates,” and “final” numbers. Each data release includes an explanation of why the GDP increased or decreased from the previous quarter (quarterly data are also annualized).

2. Producer Price Index (PPI)

What is it?

The PPI is a group of indexes that measures the changes in the selling price of goods and services received by U.S. producers over a period of time. Think of it as the business-side equivalent to the CPI that measures changes in prices paid by consumers: The PPI captures price movements at the wholesale level, before price changes have bubbled up to the retail level.

The PPI tracks price changes in virtually all goods-producing sectors, including agriculture, forestry, fisheries, mining and manufacturing. The PPI also tracks price changes for a growing portion of the non-goods-producing sectors of the economy as new PPIs are introduced. Prices from 25,000 establishments are tracked monthly.

This report measures prices for goods at three stages of production: finished goods, intermediate goods and crude goods.

This was called the Wholesale Price Index from 1902 until 1978.

Why is it important?

This index is timely because it is the first inflation measure available in the month. In addition, by watching crude prices, which are first in the chain of production trends, one can sometimes spot inflation in the pipeline, before it shows up in the CPI.

Where does the data come from?

The U.S. Department of Labor’s Bureau of Labor Statistics releases the data monthly, during the second full week of the month following the reporting month.

3. Consumer Price Index (CPI)

What is it?

The CPI measures changes in the prices paid for goods and services by urban consumers for the specified month. The CPI is essentially a measure of individuals’ cost of living changes and provides a gauge of the inflation rate related to purchasing those goods and services.

The CPI does not include every item an individual may buy, but instead takes a sampling of several hundred goods and services across 200 item categories. Data is collected through phone calls and personal visits in 87 urban areas across the country.

The CPI does not include income, Social Security taxes, or investments in stocks, bonds or life insurance. But it does include all sales taxes associated with the purchases of those goods and services.

Why is it important?

This statistic is the best indicator of inflation that we have to rely on. It is particularly closely scrutinized by financial economists now since it shows inflation to be at a 16-year low. Changes in inflation can spur the Fed to take action to change its monetary policy.

Where does the data come from?

The U.S. Department of Labor’s Bureau of Labor Statistics releases the national CPI-an average of all areas sampled, monthly, during the second or third week after the end of the measured month. CPIs for three specific metropolitan areas are also published monthly, while CPIs for other specific metropolitan regions are published every other month. Data releases include details about very specific products.

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