What’s the Difference Between Consumer Price Index and Producer Price Index?
Inflation has dominated the economic news headlines for more than a year. If you’ve been keeping up, you’ve probably heard about both the CPI and, less commonly, the PPI.
Those initialisms refer to the Consumer Price Index and the Producer Price Index, which are both important economic indicators. The Bureau of Labor Statistics (BLS) publishes both the CPI report and the PPI report, and economists rely on both to track the price changes that they use to measure the rate of inflation.
There are key differences, however, in the goods and services that each index tracks, and their compositions reveal different inflationary pressures on the economy.
According to the BLS, “The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
Those goods and services include everyday purchases like eggs, bread and milk to major appliances, cars and other big-ticket items that are heavily influenced by interest rates. By tracking the overall monthly changes in the price of such a broad variety of goods and services, the CPI can accurately measure changes in the overall cost of living. Those changes are expressed in the inflation rate.
It’s so accurate, in fact, that the government relies on the CPI to calculate cost-of-living adjustments (COLAs) for programs like Social Security and SNAP.
PPI Measures Changes in the Cost of Producing Things
According to the BLS, “The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller.”
As the CPI measures changes in the cost of living, the PPI measures changes in real growth output — inflation from the economy’s supply side as opposed to its demand side. Instead of tracking changes in the prices that consumers pay at the retail level, the PPI tracks changes in the prices that domestic producers receive at the wholesale level — and “domestic” is one of the key words.
The CPI includes personal consumption goods from overseas, which comprise a substantial amount of the index in categories like cars and apparel. The PPI, on the other hand, excludes imports.
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The CPI’s purpose is to measure changes in the actual out-of-pocket cost consumers pay for the things they buy. Therefore, the CPI includes sales and excise taxes because they are necessary expenditures that are included in the price of whatever it is you’re buying when you get to the register. Conversely, prices measured by the PPI exclude those taxes.
The cost of interest is where things get a bit more tricky.
The CPI includes services with an interest rate component, like insurance and banking, but it does not factor changes in interest rates or the cost of interest into the index. The PPI also includes insurance, banking and other services with interest rate components, but unlike the CPI, the PPI does include changes in interest rates.
Changes in interest rates, therefore, do not affect the CPI but they do affect the PPI.
Other more complex components include services like medical care. The CPI includes only direct payments that consumers make for medical care. On the other hand, the PPI includes medical services paid for by third parties like the government or an employer.
It makes a big difference. In one year that the BLS highlights for context, medical care services accounted for 23.1% of the PPI but only 5.3% of the CPI.
CPI is the Here and Now; PPI Predicts the Future
The CPI measures changes in the current cost of living. For example, the CPI might show that this time last year, consumers paid an average of $2.79 for a dozen eggs, but right now they’re paying $3.04. The CPI has revealed a high annual inflation rate of 9% in this hypothetical example.
On the other hand, price changes revealed in the PPI haven’t yet filtered down to the consumer level because the index tracks changes in costs at the production level. If it costs more for farmers to produce eggs this month than it did last month, economists can predict that consumers will pay more for eggs next month, which makes the PPI an excellent pre-inflationary indicator.
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