A:

First, let's take a look at what these two acronyms mean: the PPI is the producer price index and the CPI is the consumer price index. Both indexes calculate the change in price of a set of goods and services, however there are two fundamental differences between the producer price index and the consumer price index.

The first difference between the indexes is the targeted goods and services. The producer price index focuses on the whole output of producers in the United States. This index is very broad, including not only the goods and services purchased by producers as inputs in their own operations or as investment, but also includes goods and services bought by consumers from retail sellers and directly from the producer. In contrast, the consumer price index targets goods and services that are bought for consumption by urban U.S. residents. The CPI includes imports; the PPI does not.

The second fundamental difference between the indexes includes the prices. In the producer price index, sales and taxes are not included for the producer's returns because these factors do not directly benefit the producer. Conversely, the consumer price index includes taxes and sales because these factors do directly impact the consumer by having to pay more for the goods and services.

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

For more on this, read Economic Indicators: Producer Price Index (PPI) and Inflation: How Is It Measured?

This question was answered by Bob Schneider.

RELATED FAQS
  1. What is the difference between the consumer price index (CPI) and the producer price ...

    Learn how the PPI and CPI differ in the composition of their target sets of goods and services and the types of prices collected ... Read Answer >>
  2. What are some limitations of the consumer price index (CPI)?

    Explore some of the basic limitations of the widely used economic indicator, the consumer price index, or CPI, and examine ... Read Answer >>
  3. Is the consumer price index (CPI) a cost of living index?

    Explore the consumer price index (CPI) and understand why it is not an actual cost of living index although it is often identified ... Read Answer >>
  4. Will the consumer price index (CPI) be updated or revised in the future?

    Learn about the consumer price index (CPI) and understand how its purpose and calculation make it necessary to continually ... Read Answer >>
  5. What are the most common market indicators to follow the U.S stock market and economy?

    Understand some of the key indicators analysts use to follow the U.S. stock markets and to assess the overall condition of ... Read Answer >>
  6. What is the difference between the QQQ ETF and other indexes?

    Find out more about the PowerShares QQQ Trust, the index the QQQ tracks, and the difference between QQQ, the SPY and Nasdaq ... Read Answer >>
Related Articles
  1. Trading

    Predict Inflation With The Producer Price Index

    Find out how the PPI can be used to gauge the overall health of the economy.
  2. Retirement

    Economic Indicators: Producer Price Index (PPI)

    By Ryan Barnes Release Date: Second or third week of the month Release Time: 8:30am Eastern Standard Time Coverage: ...
  3. Markets

    Deadly Flaws In Major Market Indicators

    These indicators give investors and experts some data to work with, but they're far from perfect measures.
  4. Markets

    Using Index Futures To Predict The Future

    Want to know whether the stock market will open up or down? Check out the index futures.
  5. ETFs & Mutual Funds

    Index Investing: What Is An Index?

    An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. It would be too difficult to track every single security trading in the ...
  6. Investing

    Consumer Confidence Index

    The Consumer Confidence Index is the result of a monthly survey of 5,000 U.S. households by the Conference Board that measures how optimistic or pessimistic consumers are about the economy's ...
  7. Markets

    What Does Price Level Mean?

    Price level is the average of all current prices for goods and services in an economy.
  8. ETFs & Mutual Funds

    An Introduction To Stock Market Indexes

    Investopedia explains the five most talked about indexes and what makes them all different.
  9. Markets

    Top Indicators From The Bureau of Labor Statistics

    Of the BLS indicators, the change in nonfarm payrolls and unemployment rate, as well as the CPI and PPI, are the ones most closely watched by investors.
  10. ETFs & Mutual Funds

    Index Investing: Other Indexes

    We've covered most of the big U.S. indexes, but we've barely scratched the surface of all the other indexes in the world. There are literally thousands of indexes tracking nearly any market. ...
RELATED TERMS
  1. Producer Price Index - PPI

    A family of indexes that measures the average change in selling ...
  2. Import And Export Prices

    Two indexes that monitor the prices of imports and exports in ...
  3. Index Investing

    A form of passive investing that aims to generate the same rate ...
  4. Index Fund

    An index fund is a type of mutual fund with a portfolio constructed ...
  5. Dow Jones Global Titans 50 Index

    A market capitalization-weighted index of 50 of the largest multinational ...
  6. Total Return Index

    A type of equity index that tracks both the capital gains of ...
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center