Consumer Price Index (CPI) vs. Producer Price Index (PPI): What’s the Difference?

Consumer Price Index (CPI) vs. Producer Price Index (PPI): An Overview

The Consumer Price Index (CPI) and the Producer Price Index (PPI) are readily watched economic indicators. Although both are published by the U.S. Bureau of Labor Statistics (BLS) and both measure price changes for goods and services that track inflation, they differ importantly in the composition of their target sets of goods and services, as well as in the types of prices collected for those different goods and services.

These differences exist because the two indexes are intended to reveal different aspects of economic activity. The PPI is often used to calculate real growth by adjusting revenue sources for inflation, and the CPI is often applied to calculate cost of living adjustments (COLAs) by adjusting revenue and expense sources.

Consumer Price Index

The target set of goods and services evaluated in the Consumer Price Index (CPI) are expenditures of domestic and internationally imported consumer-related services for residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and the retired, as well as urban wage earners and clerical workers.

Note that the CPI statistics cover professionals, the self-employed, the unemployed, people whose incomes are below the federal poverty threshold, and retired people in the U.S. but exclude nonmetro or rural populations, farm families, armed forces, people currently incarcerated, and those in mental hospitals or other institutions.

The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The CPI measures items in food and beverages, housing, apparel, transportation, medical care, recreation, education, communication, and other personal goods and services, such as tobacco and smoking products, haircuts, and funerals.

Core CPI tracks core inflation, which excludes goods in the food and energy sectors. CPI-W measures the Consumer Price Index for Urban Wage Earners and Clerical Workers, while the CPI-U is the Consumer Price Index for All Urban Consumers.

Producer Price Index

In contrast, the Producer Price Index (PPI) measures the average change in sale prices for the entire domestic market of raw goods and services. These goods and services are bought by consumers from their primary producers, bought indirectly from retail sellers, or purchased by producers themselves.

The industries that comprise the PPI include mining, manufacturing, agriculture, fishing, forestry, natural gas, electricity, construction, waste, and scrap materials. As the PPI is meant to evaluate the output of U.S. producers, imports are excluded.

The BLS also separates PPI data into three main areas of classification: industry, commodity, and commodity-based final and intermediate demand (FD-ID).

The BLS reports that 10,000 PPIs for individual products and groups of products are released every month.

Special Considerations

The types of prices collected for the targeted goods and services of the PPI differ from those of the CPI. As the PPI evaluates the revenue received by its producer, it does not include sales and excise taxes in the price because these do not represent revenue to the producer. The CPI, however, does include sales and excise taxes because these factors affect the prices of the goods or services, which directly impacts the consumer as it increases or decreases the sale price.

Also, the CPI is one of the leading economic indicators of inflation, as it calculates the change in the cost of a bundle of consumer goods and services over time. A higher sale price indicates a decrease in consumer purchases and a rise in inflation, which eventually leads to adjustments in income and the cost of living.

The PPI serves as a leading indicator for the CPI, so when producers face input inflation, the increases in their production costs are passed on to retailers and consumers. The PPI also serves as a true measure of output in that it is not affected by consumer demand.