2/19/2024

PPI and CPI: the difference between them

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Last Friday, the results of the US producer price index became known, which turned out to be higher than expected. This immediately triggered a change in market dynamics. Why is this indicator so influential?

Producer Price Index as well as Consumer Price Index are two important economic indicators that are easy to track.

Although both indices are published by the US Bureau of Labor Statistics and measure changes in the prices of goods and services, they differ significantly. They are due to the fact that each of the indices is designed to assess different aspects of economic activity.

Consumer price index (CPI)

The Consumer Price Index (CPI) is based on a basket of goods and services consumed by residents of urban agglomerations, both domestically and internationally.

CPI statistics take into account the expenses of the self-employed, the unemployed, those with incomes below the federal poverty level, and retirees. The sample includes urban employees and employees living in the United States. Overall, the sample of urban consumers covers about 93% of the population.

CPI is calculated by determining the price changes for each item in a predefined basket of items and then averaging them. The index covers a wide range of personal goods and services, including food and beverages, housing, clothing, transportation, health care, recreation, education, communications, as well as tobacco, haircuts and funerals.

There are several types of this index:

  • Core CPI: Tracks core inflation, excluding food and energy items.
  • CPI-W: Measures the Consumer Price Index for urban wage and white-collar workers.
  • CPI-U: represents the consumer price index for all urban consumers.

Producer Price Index (PPI)

Producer price index (PPI), unlike CPI, measures the average change in selling prices for goods and services offered in the domestic market. These goods and services can be purchased by consumers directly from producers, indirectly through retail chains, or by producers themselves for their own needs.

The following industries are included in the PPI calculation: mining, manufacturing, agriculture, fisheries, forestry, natural gas production, electric power, construction, waste and scrap metal recycling. It is important to note that the index does not take into account imports, since its purpose is to estimate the output of American manufacturers specifically.

What is the difference between the indicators?

CPI is one of the key economic indicators of inflation. It reflects changes in the cost of a set of consumer goods and services over time. Rising prices indicate a decrease in consumer activity and an increase in inflationary pressure, which subsequently leads to an adjustment in income and cost of living.

There are differences in the price types used for CPI and PPI. The Producer Price Index measures the income a business generates, so it does not take into account sales taxes and excise taxes because they are not part of revenue. At the same time, the consumer price index includes these taxes because they directly affect the final price of goods and services for consumers, increasing or decreasing it.

PPI is a leading indicator in relation to CPI. When producers face resource inflation, they pass on rising production costs to retailers and consumers. PPI also serves as a more accurate indicator of output since it is not influenced by consumer demand.

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