What Is the Connection between CPI and PPI?

K.C. Bruning

The consumer price index (CPI) and the producer price index (PPI) both determine changes in prices of consumer services and goods. PPI tracks the prices of domestic goods from a seller’s perspective. The CPI uses a weighted average to determine the price of a group of goods. Though there are many differences between the two indexes, they also connect in significant ways, including tracking revenue and consumers, and the ways in which they can be used together.

PPI tracks the prices of domestic goods from a seller’s perspective.
PPI tracks the prices of domestic goods from a seller’s perspective.

Both the CPI and PPI adjust revenue streams in order to provide a more accurate picture of price levels. The CPI does this by taking into account changes in the cost of living. PPI determines true growth by deflating revenue streams.

As the CPI and PPI cover different, though sometimes overlapping, areas, they can be used together to give an analyst a more comprehensive picture of the market. One tracks the cost of living while the other covers what the market is producing. Using both indexes, it is easier to determine the cycle of cause and effect that drives the market.

The CPI and PPI also both track consumer activity, though in different ways. While the CPI covers both the purchases of businesses and consumers, the PPI focuses solely on customer activity. The former covers a broad area, whereas the latter centers on goods purchased by customers in urban areas.

Some analysts and investors also believe the direction the market will take can be determined by examining both the CPI and PPI. It is thought that the PPI predicts the path of the CPI. While this may occasionally seem to be the case, the type of information included in each index and the manner in which data is collected are too different to provide an accurate match. This means that even when similar types of activity are studied, they do not necessarily show up the same way in the indexes.

The CPI and PPI also both contain domestic goods, though they treat them in different ways. While the PPI relies solely on domestic activity, the CPI also tracks domestic consumption of foreign goods. This means that while both indexes include domestic consumption, the CPI does not include a producer for each product consumed.

There are several ways in which the PPI and CPI diverge as well. One significant variance is that information for the PPI is collected monthly, while the CPI is tracked for two months before it is updated. Things such as sales and excise taxes and distribution costs also differ among the two indexes.

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