What Is the Difference Between the CPI and the PPI?
Uncover how essential economic indicators track price changes from distinct angles, revealing deeper insights into inflation.
Price indexes track changes in the cost of goods and services, providing a measure of inflation or deflation. These indicators reflect different aspects of economic activity, offering insights into the financial landscape and its impact on various economic participants.
Understanding the Consumer Price Index (CPI)
The Consumer Price Index (CPI) measures the average change over time in the prices urban consumers pay for a basket of goods and services. This basket represents everyday purchases, including items such as food, housing, transportation, and medical care. The Bureau of Labor Statistics (BLS) collects this data monthly from thousands of retail stores, service establishments, and rental units across the country.
The CPI captures the cost of living for consumers, reflecting out-of-pocket expenditures. It encompasses prices for about 80,000 items each month, covering approximately 93% of the U.S. population. The weight of each item in the basket is determined by consumer spending habits. This index includes user fees and sales or excise taxes consumers pay directly. However, it generally excludes income taxes, investment items like stocks or bonds, and purchases of houses.
Understanding the Producer Price Index (PPI)
The Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. This index tracks prices from the perspective of the seller, covering raw materials, intermediate goods, and finished products at the wholesale level. The BLS collects this data through surveys of producers across various industries, including manufacturing, mining, and services.
The PPI captures price changes at the first commercial transaction stage for many products and services. It reflects the revenue producers receive for their goods and services, not the price paid by a consumer. Approximately 10,000 individual PPIs are released monthly.
Data is gathered from over 25,000 establishments. The index measures price changes for the entire marketed output of U.S. producers, including goods and services purchased by other producers as inputs, or those sold for export and to the government. The PPI was formerly known as the Wholesale Price Index until 1978.
Distinguishing Between CPI and PPI
The CPI and PPI differ in their fundamental perspectives. The CPI tracks prices from the consumer’s viewpoint, reflecting what households pay for goods and services. Conversely, the PPI measures prices from the producer’s perspective, representing the revenue received by domestic businesses for their output. This distinction means they capture price changes at different stages of the economic pipeline.
Regarding coverage, the CPI includes prices of imported goods that consumers purchase. In contrast, the PPI focuses on domestically produced goods and services and excludes imports. The PPI also includes exports and sales to businesses as inputs to production, which the CPI does not.
Another difference lies in the treatment of taxes. The CPI includes sales and excise taxes because these are direct expenditures by the consumer. The PPI excludes these taxes because they do not represent revenue to the producer. These differing inclusions mean each index provides unique insights into inflation.
The Broader Significance of Price Indexes
Both the CPI and PPI are economic indicators providing information about price changes and inflation. Policymakers, such as the Federal Reserve, monitor these indexes when making monetary policy decisions, including interest rates. Consistent increases can signal inflationary pressures, potentially leading to actions aimed at managing price stability.
Businesses use PPI data to assess input costs and adjust pricing strategies. Understanding producer-level price movements helps companies forecast future costs and manage profit margins. This information is also used for wage adjustments and contractual agreements.
Individuals use the CPI to understand changes in their purchasing power and the cost of living. Cost-of-living adjustments for wages, benefits, and government programs like Social Security are often tied to the CPI. While distinct, the PPI can sometimes serve as a leading indicator for the CPI, as changes in producer costs may eventually be passed on to consumers.