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 goods and services bought by consumers from retail sellers and directly from the producer. In contrast, the consumer price index targets goods and services bought for consumption by urban U.S. residents. The CPI includes imports; the PPI does not.

The second fundamental difference between the indexes is what is included in the price. 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).)

RELATED FAQS
  1. How does inflation affect fixed-income investments?

    Learn about the ways inflation can harm fixed-income investments. Find out how to monitor the impact of inflation using common ... 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. What economic indicators are most used when forecasting an exchange rate?

    Discover what economic indicators are most widely used to forecast a country’s exchange rate and how various factors influence ... Read Answer >>
  4. Is it possible to invest in an index?

    While you cannot buy indexes, which are just benchmarks, there are three ways for you to mirror their performance. Read Answer >>
  5. Does the consumer price index (CPI) correlate with the change in price of goods and ...

    See why the consumer price index is a questionable proxy for inflation, and why it is unlikely to represent experiences with ... Read Answer >>
  6. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
Related Articles
  1. Investing

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
  2. Trading

    4 Key Indicators That Move The Markets

    Do you rely on indicators to make an investment move? Find out these key economic and market indicators to watch and react to market movements.
  3. Trading

    Using Index Futures to Predict the Future

    Want to know whether the stock market will open up or down? Learn about index futures and how they can help predict how the market will trade.
  4. Insights

    5 Economic Reports You Should Watch

    Most economic reports are noise, but there are a some that are market movers.
  5. Investing

    ETF Tracking Errors: Protect Your Returns

    Tracking errors tend to be small, but they can still adversely affect your returns. Learn how to protect against them.
  6. Investing

    The Hidden Flaws of Index Investing

    Index investing isn't always better than active investing. Here's why.
  7. Insights

    U.S. Retail Sales Flat In July

    U.S. retail sales missed expectations in July putting a damper on growth and decreasing the chances of a rate hike.
  8. Trading

    Index Options: A How-To Guide

    Index options, financial derivatives that derive their value from a stock index, can provide stability and peace of mind for less risky investors.
RELATED TERMS
  1. Producer Price Index - PPI

    The producer price index (PPI) is a family of indexes that measures ...
  2. Indexing

    In the financial markets, indexing can be used as a statistical ...
  3. Composite

    A composite is a grouping of equities, indexes or other factors ...
  4. Index

    An index measures the performance of a basket of securities intended ...
  5. Basket

    A basket is a single unit of at least 15 stocks that are used ...
  6. Farm Price Index - FPI

    An index that monitors the prices received by farmers for sales ...
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center