What is the relationship between the PPI and the CPI?

By Bob Schneider AAA
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.

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