What Is the Relationship Between the PPI and the CPI?

Both the Producer Price Index (PPI) and the Consumer Price Index (CPI) are economic indicators that calculate the change in price of a set of goods and services.

PPI measures change over time in the prices that producers receive for goods and services. In contrast, CPI measures change over time in prices that consumers pay for goods and services.

PPI and CPI are related to each other in some respects. Historically, the two measures have risen and fallen in similar patterns. However, the relationship is not straightforward, and there have also been instances where PPI rises while CPI falls, or vice versa.

Key Takeaways

• PPI ad CPI are both indicators that measure change in price over time for goods and services.
• PPI reflects changes in the price that producers receive; CPI reflects changes in the price that consumers pay.
• The two indicators are somewhat linked to each other, but that relationship isn’t always straightforward.
• In some instances, PPI can increase while CPI rises more slowly or not at all.
• These divergences are rooted in definitional differences between the two indexes.

PPI vs. CPI

There are there are fundamental differences between PPI and CPI.

The first difference is the targeted goods and services. The PPI focuses on prices received by producers. This index is very broad, as it includes goods and services from across a chain of production, including raw materials, intermediary manufacturing, and retail sales. In contrast, the CPI targets prices paid for by consumers of a fixed basket of goods and services. Notably, CPI includes imports, while PPI does not.

Another fundamental difference is what’s included in the index. For PPI, sales taxes are not included in the measure of producers’ returns, because such money does not directly benefit the producer. Conversely, CPI includes sales taxes because such a factor does directly impact the consumer, who is made to pay more for the goods and services.

These differences exist because the indexes are intended to show different aspects of economic activity. PPI is often used to calculate real growth by adjusting inflated revenue sources, and CPI is often applied to calculate changes in the cost of living by adjusting revenue and expense sources.

What Is the Relationship Between PPI and CPI?

Because PPI incorporates changes in prices for goods and services throughout a chain of production, it reflects not only increases in retail prices but also increases in raw input costs.

When producers themselves face increased input costs, they often choose to pass them along to customers in the form of price increases. In such a case, higher PPI can be correlated to a subsequently higher CPI, as well.

However, the two indexes do not always have such a direct relationship, due to the differences in how they are measured. Consider the fact that CPI includes prices paid by consumers for imported goods and services, whereas PPI includes prices received my domestic producers only. Theoretically, if PPI were to increase, but the costs of imported goods and services either remained constant or fell, this could lead to a situation where CPI does not rise at the rate that PPI does, if at all.

As such, PPI may be loosely related to CPI, but because of definitional differences between the two indexes, they aren’t necessarily always directly linked.

What Is the Most Accurate Inflation Indicator?

CPI is the most accurate inflation indicator. The Bureau of Labor Statistics (BLS) compiles the measure, which has been in use since World War I.

How Is CPI Basket Determined?

The consumer price index is calculated based on the price changes to a fixed basket of goods and services, including food and beverages, housing, apparel, transportation, medical care, recreation, education, communication, and among others. This basket was developed based on detailed and actual consumer spending data.

Does Higher PPI Mean Higher Inflation?

Higher PPI can signal higher inflation, because prices received by producers often shape prices paid by consumers. However, this is not always the case, in large part because CPI reflects not just domestic goods and services but imports as well. Should domestic prices rise, but imported prices fall, CPI may not increase at the same rate as PPI.

The Bottom Line

PPI and CPI are both indexes used to measure changes in price. The producer price index (PPI) measures the change in price received by domestic producers to produce goods and services; it doesn’t include sales tax. The consumer price index measures the change in price paid by consumers to obtain goods and services; it includes sales tax. These goods and services can be both domestic and imported.

Intuitively, it may seem reasonable that PPI and CPI are closely related, that if prices charged by producers for goods and services rise, so will prices paid by consumers. However, this isn’t always the case.

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