Consumer Price Index (CPI) vs. Producer Price Index (PPI): What’s the Difference?

Reviewed by Robert C. KellyFact checked by Daniel RathburnReviewed by Robert C. KellyFact checked by Daniel Rathburn

Consumer Price Index (CPI) vs. Producer Price Index (PPI): An Overview

The Consumer Price Index (CPI) and the Producer Price Index (PPI) are readily watched economic indicators. Although both are published by the U.S. Bureau of Labor Statistics (BLS) and both measure price changes for goods and services that track inflation, they differ importantly in the composition of their target sets of goods and services, as well as in the types of prices collected for those different goods and services.

These differences exist because the two indexes are intended to reveal different aspects of economic activity. The PPI is often used to calculate real growth by adjusting revenue sources for inflation, and the CPI is applied to calculate cost of living adjustments (COLAs) by adjusting revenue and expense sources. Learn more about the differences between PPI and CPI and what they’re used for.

Key Takeaways

• The Consumer Price Index (CPI) and the Producer Price Index (PPI) are economic indicators that measure inflation in the United States.
• The CPI evaluates expenditures of domestic and internationally imported consumer-related services for residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and the retired, as well as urban wage earners and clerical workers.
• The PPI looks instead at the prices that producers pay and measures changes in the sale prices for the entire domestic market of raw goods and services.

Consumer Price Index

The target set of goods and services evaluated in the Consumer Price Index (CPI) are expenditures of domestic and internationally imported consumer-related services for residents of urban or metropolitan areas.

The CPI statistics cover professionals, the self-employed, the unemployed, people whose incomes are below the federal poverty threshold, and retired people in the U.S. as well as urban wage earners and clerical workers. However, they exclude nonmetro or rural populations, farm families, armed forces, people currently incarcerated, and those in mental hospitals or other institutions. All told, the urban consumer group covers about 93% of the population.

The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The CPI measures items in food and beverages, housing, apparel, transportation, medical care, recreation, education, communication, and other personal goods and services, such as tobacco and smoking products, haircuts, and funerals.

Core CPI tracks core inflation, which excludes goods in the food and energy sectors. CPI-W measures the Consumer Price Index for Urban Wage Earners and Clerical Workers, while the CPI-U is the Consumer Price Index for All Urban Consumers.

Note

In August 2024, the Consumer Price Index increased by 0.2% on a seasonally adjusted basis; the same as in July 2024. Over the previous 12 months, the index increased by 2.5% before seasonal adjustment.

Producer Price Index

In contrast, the Producer Price Index (PPI) measures the average change in sale prices for the entire domestic market of raw goods and services. Consumers buy these goods and services from their primary producers, bought indirectly from retail sellers, or purchased by producers themselves.

The industries that comprise the PPI include mining, manufacturing, agriculture, fishing, forestry, natural gas, electricity, construction, waste, and scrap materials. As the PPI is meant to evaluate the output of U.S. producers, imports are excluded.

The BLS also separates PPI data into three main areas of classification: industry, commodity, and commodity-based final and intermediate demand (FD-ID).

The BLS reports that 10,000 PPIs for individual products and groups of products are released every month.

Important

Until 1978, the Producer Price Index (PPI) was known as the Wholesale Price Index (WPI). In 1982, the BLS reset all PPI bases to 100, and this event became the base year.

Key Differences

The CPI is one of the leading economic indicators of inflation, as it calculates the change in the cost of a bundle of consumer goods and services over time. A higher sale price indicates a decrease in consumer purchases and a rise in inflation, eventually leading to income adjustments and the cost of living.

The types of prices collected for the targeted goods and services of the PPI differ from those of the CPI. As the PPI evaluates the revenue received by its producer, it does not include sales and excise taxes in the price because these do not represent revenue to the producer. The CPI, however, does include sales and excise taxes because these factors affect the prices of the goods or services, which directly impacts the consumer as it increases or decreases the sale price.

The PPI serves as a leading indicator for the CPI, so when producers face input inflation, the increases in their production costs are passed on to retailers and consumers. The PPI also serves as a true measure of output in that it is not affected by consumer demand.

Which Is More Important: CPI or PPI?

Both CPI and PPI are leading economic indicators. The Federal Reserve (the Fed) uses both reports to assess the economy and inform its policy and decision-making,

Is PPI a Good Indicator of Inflation?

The PPI is a good pre-indicator of inflation. When prices rise for businesses—the producers of the products to be purchased by consumers—it is reflected in the PPI and can have a direct effect on retail pricing.

What’s the Relationship Between CPI and PPI?

The PPI serves as a leading indicator for the CPI. When prices rise for producers, as is tracked by the PPI, they tend to pass on those costs to consumers, as is tracked by the CPI.

The Bottom Line

Both the CPI and the PPI are economic indicators that signify inflation. By paying attention to these reports, and knowing that the Fed often hikes interest rates to try to combat inflation, you can make educated decisions with your money.

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