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. When has the United States run its largest trade deficits?

    Learn in what year the United States ran its largest negative balance of trade as a result of imports greatly exceeding the ...
  2. Which is more important to a nation's economy, the balance of trade or the balance ...

    Learn how to differentiate between the balance of trade and balance of payments for international trade and why the balance ...
  3. What are the ethical arguments against government subsidies to companies like Tesla?

    Learn about the ethical argument behind government subsidies.
  4. How can tariffs cause inefficiencies in domestic industries?

    Understand what a tariff is and why a government would want to impose a tariff. Learn how tariffs can contribute to domestic ...
RELATED TERMS
  1. Delivered Duty Unpaid - DDU

    A transaction in international trade where the seller is responsible ...
  2. Optimal Currency Area

    The geographic area in which a single currency would create the ...
  3. European Monetary System - EMS

    A 1979 arrangement between several European countries which links ...
  4. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
  5. European Economic and Monetary Union (EMU)

    The successor to the European Monetary System (EMS), the combination ...
  6. Deflationary Spiral

    A deflationary spiral is when a period of decreasing prices (deflation) ...

You May Also Like

Related Articles
  1. Economics

    What to Expect from Russia's Oil-Dependent ...

  2. Stock Analysis

    China: Why Big Investors are Turning ...

  3. Professionals

    The Most Popular ETFs with Financial ...

  4. Professionals

    Will Consumer Spending Save 2015?

  5. Investing

    Where Are Real Estate Stocks Heading?

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!