These days everyone is worried about inflation. The financial media often distill reporting about inflation down to a single, easy to understand number. “Inflation rose 5% in March,” they will say. What are they talking about, exactly? What is the CPI? What is the PPI? And, what is the difference between the PPI and CPI?
What Is the PPI?
The PPI is the Producers Price Index. The PPI is an index that measures the average change over time in the selling prices by the producers of goods. The PPI measures price changes from the producer’s perspective. The main Producer’s Price Index is composed of the approximately 10,000 PPIs for individual products and groups of products generated each month.
What Is the CPI?
The CPI is the Consumers Price Index. The CPI measures the average monthly change in the prices of a set of goods and service commonly consumed by U.S. households. The CPI measures price changes from the consumer’s perspective. The CPI measures a specific set of items and services that are set in advance.
How Are the PPI and the CPI Different?
To understand the difference between PPI and CPI, we need to look at their construction and purpose.
The PPI is used to understand the prices received by domestic producers. Such prices are often not the same as the price customers pay. For example, assume that XYZ company makes widgets. XYZ sells its widgets to a store like Best Buy, or a wholesaler. The price XYZ receives from Best Buy or the wholesaler goes into the PPI. Of course, Best Buy marks up the price to pay for the expenses of running a store and to make a profit. The price the customer pays, including tax, would go into the CPI.
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All things being equal, while the PPI and CPI would be different, they would always differ by the same amount. However, XYZ and Best Buy may raise or lower prices at different times and for different reasons. Best Buy might markup widgets because of higher demand, while XYZ continues to sell at the same rate, and vice versa.
Another major difference between the CPI and the PPI is that the PPI only considers domestic (U.S.) producers. No imports are included. The CPI does include imports in the average.
Finally, the PPI and the CPI consider different goods. The CPI only accounts for a specific collection of household goods and services while the PPI considers tens of thousands of goods but does not cover all services. Most importantly, the CPI accounts for owners’ equivalent rent, or how much a person pays for their home. The PPI does not account for this number at all.
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Why Are CPI and PPI Different?
The important part to remember is that the CPI and PPI are calculated consistently, so while the rates may not be consistent with each other, the different effects of the economy on each index are consistent. The CPI and PPI often show inflation moving in the same direction. Which index you use depends on what data you are trying to get.