What Is Ppi Inflation? - TheMoneyFarm

The Producer Price Index (PPI) program calculates the average change in selling prices for domestic producers’ output over time. For many products and services, the prices included in the PPI are from the first commercial transaction.

Does the PPI track inflation?

In our economy, we have two inflationary measures: the Consumer Price Index (CPI) and the Producer Price Index (PPI) (PPI). The Consumer Price Index (CPI) is a measure of the total value of goods and services purchased by consumers over a certain time period, whereas the Producer Price Index (PPI) is a measure of inflation from the perspective of producers.

PPI stands for Producer Price Index.

The Producer Price Index (PPI) is a collection of indexes that track the average change in selling prices received by domestic goods and service providers over time. PPIs are used to track price changes from the seller’s perspective. Other indexes, such as the Consumer Price Index (CPI), measure price change from the perspective of the customer. Due to government subsidies, sales and excise taxes, and distribution costs, the prices of sellers and buyers may differ.

There are three basic PPI classification systems, all of which are based on the same pool of pricing data submitted to the BLS by collaborating corporate reporters:

Classification of industries. An industry’s Producer Price Index is a measure of changes in prices paid for output sold outside the industry (that is, its net output). The PPI releases around 535 industry pricing indexes, as well as over 4,000 particular product line and product category sub-indexes and approximately 500 indexes for industry groupings. The North American Industry Classification System (NAICS) index codes allow other economic programs to compare productivity, production, employment, wages, and earnings with a wide range of industry-based data.
Classification of commodities. Regardless of the industry classification of the producing institution, the PPI’s commodity classification system classifies products and services by similarity or material composition. This scheme is unique to the PPI and does not correspond to any other coding system. PPI produces around 3,700 commodity price indexes for commodities and roughly 800 commodity pricing indexes for services (seasonally adjusted and nonseasonally adjusted), grouped by product, service, and end use.
Final Demand-Intermediate Demand (FD-ID) System based on commodities. Commodity-based FD-ID price indexes group commodity indexes for goods, services, and construction at the six-digit subproduct class level, according to the kind of customer and the amount of physical processing or assembly the products have through. The PPI provides over 600 FD-ID indices (seasonally adjusted and nonseasonally adjusted) that track price changes for final and intermediate demand products, services, and construction. With the release of data for January 2014, the FD-ID system superseded the PPI stage-of-processing (SOP) system as PPI’s principal aggregation mechanism. By integrating indexes for services, construction, exports, and government purchases, the FD-ID system extends the reach of its aggregate measures beyond those of the SOP system.
Indexes for special commodity groups (e.g. fabricated metal products and textile mill products).

What can you learn from the producer pricing index?

The Producer Price Index is a group of indexes that track the average change in selling prices received by domestic goods and service providers across time. PPIs are used to track price changes from the seller’s perspective. Other indexes, such as the Consumer Price Index (CPI), measure price change from the perspective of the customer.

Each month, around 10,000 PPIs for individual items and groups of products are released. PPIs are available for nearly all industries in the goods-producing sectors of the US economy, including mining, manufacturing, agriculture, fishing, and forestry, as well as natural gas, electricity, construction, and goods that are comparable to those made in the producing sectors, such as waste and scrap materials. According to income reported in the 2007 Economic Census, the PPI program covers almost 72 percent of the service sector’s production.

How are PPIs used?

Data from the Producer Price Index are frequently used by both the business community and the government. The following are three prominent applications:

As a measure of the economy. PPI changed its major index aggregation structure from the Stage of Processing (SOP) system to the Final Demand-Intermediate Demand (FD-ID) system in January 2014. The move to the FD-ID system is the culmination of a long-standing PPI goal to incorporate PPIs for services, construction, government purchases, and exports into the SOP system (domestically produced commodities for domestic, nongovernment consumption). By including indexes that examine inflation from the producer perspective for goods, services, and construction sold as personal consumption, capital investment, government purchase, and export, the FD portion of the FD-ID system expands coverage relative to the finished goods stage of the SOP system. The ID section of the system allows data users to look at inflation from the point of view of the producer for goods, services, and construction sold to businesses as inputs to production, but not for capital investment. Two concurrent treatments of intermediate demand are included in the ID section of the system: commodity type and production flow. Price movements for services acquired by enterprises, as well as price movements for processed and unprocessed goods, are tracked using the commodity-type treatment. Intermediate demand is treated as a production flow, which follows price changes as they pass through several stages of production. The production flow treatment allows for a systematic examination of how variations in inflation rates experienced by producers at earlier stages of production are communicated to later stages, including final demand. These data are used by the President, Congress, and the Federal Reserve in developing budgetary and monetary policy.

Commodity-based producer output price indexes are used to create FD-ID indexes. The proportions of use by type of buyer are used to assign these commodity-based output price indexes to aggregate categories. The table titled “Use of commodities by industries, before redefinition” from the Benchmark Input-Output Data Tables of the United States, produced by the United States Bureau of Economic Analysis, is the main source of data used to establish buyer type (BEA). Final demand (consumption, capital investment, government, and export) and intermediate demand (consumption, capital investment, government, and export) are the two main types of customers covered by the FD-ID system (business purchases, excluding capital investment). Because different buyer types frequently purchase the same product, commodities are frequently included in multiple FD-ID indices. Regular gasoline, for example, is purchased for personal use, export, government usage, and commercial use. For normal gasoline, the PPI program produces only one commodity index that reflects sales to all sorts of buyers. Regardless of whether the gasoline is sold for personal consumption, export, government, or businesses, this index is used in all FD-ID aggregations, with variances accounted for in the applicable weights to each aggregate FD or ID index. In some circumstances, buyer type is a significant price deciding factor, leading to the creation of commodities indexes based on it. Separate indexes for consumer and commercial loans were created inside the PPI category for loan services, for example. In this situation, the consumer loan commodity index would be included in the final demand index, whereas the business loan commodity index would be classified as intermediate demand.

Other economic series can be used as a deflator. PPIs are used to account for price changes in other economic time series and to convert them into inflation-free dollars. For example, deflators based on PPI data are used to estimate constant-dollar gross domestic product data.

As a foundation for contract re-negotiation. Purchase and sales contracts are frequently adjusted using PPI data. These contracts usually mention dollar sums that must be paid at a later date. An adjustment clause that adjusts for changes in input prices is frequently desirable. For example, if the percent change in the PPI for wheat is applied to the contracted price for bread, a long-term contract for bread can be adjusted for changes in wheat prices. (See Contracting Parties’ Price Adjustment Guide.)

When did the Wholesale Price Index become the Producer Price Index?

The program was known as the Wholesale Price Index (WPI) from its start in 1902 until 1978, when it was renamed the Producer Price Index. Simultaneously, the focus switched from a single index that covered the entire economy to the SOP system, which consists of three basic indexes that cover the various stages of production in the economy. BLS reduced the occurrence of duplicate counting in aggregate commodity-based indexes by shifting the emphasis. PPI switched from the SOP to the FD-ID system in 2014. Through the addition of prices and weights for services, construction, government purchases, and exports, the FD-ID system extends primary aggregate index coverage beyond the SOP system.

The name change from Wholesale Price Index to Producer Price Index was not accompanied by a change in index methodology, and the price index data remained unchanged. The nomenclature change reflects the output price index theoretical model that underpins the PPI. (See “On the Theory of Industrial Price Measurement: Output Price Indexes,” BLS Working Paper 44.) Furthermore, the moniker “Wholesale Price Index” was deceptive because the index never tracked changes in wholesale prices. As a result of the changes in nomenclature and analytical emphasis, no indexes have been withdrawn.

How does the Producer Price Index differ from the Consumer Price Index?

While both the PPI and the CPI track price changes for a defined set of products and services across time, the CPI and PPI differ for three primary reasons:

The PPI includes the full marketed output of US producers as a target set of goods and services. This includes goods, services, and construction products purchased by other producers as inputs to their operations or as capital investment, as well as goods and services purchased by consumers directly from the service producer or indirectly through a retailer, and products sold for export and to the government.

The CPI’s target set of items is the collection of goods and services purchased for consumption by urban households in the United States.

The target set of items differs between CPI and PPI in several ways: (1) the CPI includes imports, whereas imports are excluded from PPI; (2) owners’ equivalent rent is included in CPI but not in PPI; (3) the CPI only includes components of personal consumption that are directly paid for by the consumer, whereas the PPI includes components of personal consumption that are not paid for by the consumer (for example, government-paid medical services or insurance); and (4) the CPI only includes components of personal consumption that

The revenue obtained by the producer of an item included in the PPI is the price collected. Because sales and excise taxes do not reflect revenue to the producer, they are not included in the price. The out-of-pocket expenditure by a consumer for an item included in the CPI is the price collected. Because sales and excise taxes are necessary consumer expenditures for the item, they are included in the price.

In contrast to the CPI, the PPI does not currently include all services. In the mid-1980s, PPI began expanding its coverage beyond mining, manufacturing, agriculture, and utilities, introducing its first services price index in 1985, and the drive to expand coverage into the services sector of the economy is still ongoing. According to 2007 Census revenue, PPI presently covers about 72 percent of services. Because the PPI lacks complete coverage of its targeted set of in-scope services, the CPI includes a number of consumer services that the PPI does not. Education services and residential rent are two of the most essential of them.

Except for coverage, the disparities between the PPI and the CPI are consistent with the two measures’ differing applications. The PPI is primarily used to deflate revenue streams in order to calculate real production growth. The CPI is primarily used to modify income and expenditure streams in response to changes in the cost of living.

How is an index interpreted?

An index is a tool that makes calculating movements in a numerical series easier. The movements are compared to a base period in which the index is set at 100. Some PPIs currently have an index base set to 1982 = 100, whereas the rest have an index base that corresponds to the month before the index was launched. The Bureau of Labor Statistics (BLS) tracks pricing changes in relation to that figure. For example, an index level of 110 represents a 10% increase in prices since the base period; similarly, an index level of 90 shows a 10% fall in prices. Price indexes are frequently expressed as % changes rather than index point changes from month to month since index point changes are affected by the index’s level, whereas percent changes are not. Calculating percent changes has the advantage of producing consistent results regardless of the base period used. The computation of index point and % changes is demonstrated in the example below.

How are PPIs calculated?

PPIs are calculated using a modified Laspeyres index formula. The Laspeyres index compares revenue from a set of products in the base period to revenue from the same set of items in the current period.

The index is the weighted average of price relatives (price ratios for each item) in this format. The weights are represented in value form by the phrase.

How are PPIs weighted?

Sampled items are weighted by a measure of their size and importance to improve the precision of PPI price change estimations. Price indexes are created for tightly defined groups of commodities or services in the initial step of PPI computation. The income of the producing establishment for the product line is used to weight the specific items contained in these indices. Indexes for specific commodities and services are integrated into aggregate indexes in the second step of PPI computation. The data used to weight the product-line indexes comes mostly from the Bureau of Census’s economic censuses. Every five years, these weights are changed.

For each of the three forms of aggregate indexes, the weights for integrating product-line indexes into aggregate indexes varies slightly. Product-line weights are the value of shipments from establishments in the industry principally involved in the manufacturing of the product to establishments outside the industry for industry net output indices. Product line weights are the gross value of shipments across all industries involved in the manufacture of the product for the commodity grouping indexes. The product-line weights from the commodity grouping indexes are given to higher level indexes for the commodity Final Demand-Intermediate Demand indexes based on relationships seen in the US input-output accounts and commodity type.

How are producers and products selected for the PPI survey?

PPIs are published for practically all industries in the goods-producing sectors of the US economy, and while more indices are being added all the time, they are now accessible for just over three-quarters of the service sector. Producers are normally chosen for the survey using a systematic sample from a list of all enterprises that file with the Unemployment Insurance System for every given industry. Supplementary data from other publicly available lists is occasionally used to fine-tune the industry’s frame of establishments. It is occasionally essential to use frames other than the list from the Unemployment Insurance system for service-sector industries to assess additional establishment data. The size of a company’s workforce determines its chances of being chosen. After a company has been chosen and has agreed to participate in the survey, disaggregation is utilized to identify which individual items or services will be included in the PPI.

Disaggregation is a method of selecting things based on their relative value to the manufacturer’s overall revenue through iterative phases. First, a respondent categorizes the different types of things shipped. These categories are then subdivided further by pricing influencing factors such as choices, color, and size. To distinguish between different sorts of purchasers or discounts, more breakdowns may be required. The disaggregation process continues until a single product sold to a single buyer is identified.

How are PPI data collected?

When a business is chosen to participate in the PPI survey, a field economist visits the business to ask voluntary participation and to notify the business of the tight confidentiality regulations that will protect the information requested. Once cooperation is gained, the field economist selects the individual commodities or services for which prices will be reported using the disaggregation technique (see Question 8).

Following that, the organization uses a secure website to report pricing for the selected products on a monthly basis. Establishments are asked to declare their prices as of the Tuesday preceding the month’s 13th. Over 100,000 prices are solicited each month from roughly 25,000 reporters. When a business fails to report or reports incomplete data, a BLS economist contacts the business and asks the information. Establishments continue to report until a new industry sample is chosen, which takes about 7 to 8 years on average.

Are PPI prices shared with other BLS price programs?

Yes, in some circumstances. The Consumer Price Index Program, the Producer Price Index Program, and the International Price Program may exchange resources to collect pricing information from respondents who are selected for inclusion in several surveys in order to maximize efficiency and reduce total respondent burden. In these circumstances, many price programs may utilize the same price for the same product or service; nevertheless, each program would decide appropriate weighting based on its own methodology. The BLS confidentiality guarantee ensures that all information provided across programs is used solely for statistical reasons.

When should seasonally adjusted PPIs be used?

Seasonally adjusted indexes are favored for studying short-to-medium-term pricing patterns in the economy because they eliminate the effect of changes that happen at around the same time and magnitude each year. Normal weather trends, routine manufacturing and marketing cycles, model changeovers, seasonal discounts, and holidays can all cause such periodic changes. Seasonally adjusted data is stripped of these periodic price changes, showing underlying pricing trends.

Users who require information that can be linked to actual dollar-value transactions are most interested in unadjusted data. Marketing professionals, purchasing agents, budget and cost analysts, contract specialists, and commodities traders are among those that require this information. For rising contracts, purchase agreements, or real estate leases, unadjusted data is almost always used.

Are actual prices published?

No, the Bureau of Labor Statistics only releases indexes, not actual or average prices. The indices are, of course, calculated using actual transaction prices. Actual prices are not released since respondents to the PPI study offer them on a voluntary and confidential basis. If a PPI user needs a time series of actual pricing for an item, BLS recommends getting an actual price from a published source, such as a trade journal, and moving it forward or backward by the necessary PPI change.

What types of indexes are published?

There are three basic PPI classification schemes that use the same pool of price data provided by cooperating firm survey respondents to the BLS:

Classification of industries. An industry’s Producer Price Index is a measure of changes in prices paid for output sold outside the industry (that is, its net output). The PPI provides over 500 industry pricing indexes, as well as over 4,000 particular product line and product category sub-indexes, and roughly 500 indexes for industry groupings. The North American Industry Classification System (NAICS) index codes allow other economic programs to compare productivity, production, employment, wages, and earnings with a wide range of industry-based data.
Classification of commodities. Regardless of the industry classification of the producing institution, the PPI’s commodity classification system classifies products and services by similarity or material composition. This scheme is unique to the PPI and does not correspond to any other coding system. PPI produces around 3,800 commodity price indexes for commodities and roughly 900 commodity pricing indexes for services (seasonally adjusted and nonseasonally adjusted), grouped by product, service, and end use.
Final Demand-Intermediate Demand (FD-ID) System based on commodities. Commodity-based FD-ID price indexes group commodity indexes for goods, services, and construction at the six-digit subproduct class level, according to the kind of customer and the amount of physical processing or assembly the products have through. The PPI provides over 600 FD-ID indices (seasonally adjusted and nonseasonally adjusted) that track price changes for final and intermediate demand products, services, and construction. With the release of data for January 2014, the FD-ID system superseded the PPI stage-of-processing (SOP) system as PPI’s principal aggregation mechanism. By integrating indexes for services, construction, exports, and government purchases, the FD-ID system extends the reach of its aggregate measures beyond those of the SOP system. (For more information, read Questions 22 and 23.)

Are Producer Price Indexes subject to change after being published?

Yes. An index is subject to recalculation after it is originally released to account for late survey reports and respondent revisions. Every index is revised every month, up to four months after it was first released. Furthermore, previously published seasonally adjusted indexes may alter in January when fresh seasonal factors are generated and applied to the most recent five years of data.

Why do some PPIs go in and out of publication or disappear altogether?

If one or more of the following conditions are not met, PPIs are no longer published.

A minimum number of reporting units must cooperate with the index (establishments). If an index fails to meet this criterion, it will most likely remain unpublished and unreleased until a fresh sample of establishments for the industry is chosen. Of course, if the commodity in issue is no longer produced in the United States, the index will no longer exist.
The index must have actual prices from a minimum number of reporting units in any given month. If an index fails to meet this criterion, it may only be out of print for a short time. The index will be released again if a sufficient number of price quotations are obtained in consecutive months. In addition, if more reports are received after the index is recalculated 4 months after publication, it may be published.

Is the base period subject to change?

Yes, the official reference period can be changed through a procedure known as rebasing, which is used infrequently. This makes comparing PPIs to other economic indicators compiled by the federal government more easier. The changeover to the 1982 reference period took place in January 1988, in accordance with the Office of Management and Budget’s mandate to use common reference periods for all federal statistics. See the Rebasing of Selected Producer Price Indexes Special Notice.

What historical data are available?

The Producer Price Index program is the federal government’s oldest continuous statistical collection. It covered the years 1890 to 1901 when it was originally published in 1902. Since the early 1900s, a few important commodity-based indices have been available. The FD-ID system was first launched in January 2011 as a set of experimental indexes before becoming the primary PPI aggregation structure with the publication of indexes in January 2014. The FD-ID structure includes all of the previous SOP indexes. Almost all new FD-ID goods, services, and construction indices include historical data from November 2009 or April 2010, while goods indexes that correlate to historical SOP indexes date from the 1970s or earlier. Since the early 1980s, the majority of manufacturing and mining industry indexes have been available. Some industry-based indices for services have been published since the mid-1990s, and the majority of them have data from the early to mid-2000s.

What price index should I use for adjustment?

Rather than indexes for the products or services being sold, an index that measures the expenses of supplying a certain product or service should be chosen. If an apparel manufacturer is contracting with a completed fabric producer for long-term purchases, the adjustment provision should be tied to a PPI for synthetic fibers rather than a PPI for a specific type of finished fabric.

When deciding on the level of index aggregation or detail to use, keep in mind that while detailed indexes may target expenses more precisely, they are more likely to be discontinued by BLS or to have periodic gaps in availability. Contracts should include provisions for these situations, though they may be minimized if only the higher-level categories are mentioned. Furthermore, because certain indexes are not available, proxies must be used to estimate price movements for some data. Also see PPI Industry or Commodity Data: Which Better Suits Your Needs? and Price Adjustment Guide for Contracting Parties (PDF).

Where are PPI data published?

Press Release from PPI. This report includes a narrative explanation of the month’s important aggregate index changes, as well as numerous supporting data tables for the primary components of the Final Demand-Intermediate Demand indexes. It is released once a month on a specific date (see Question 20).

Detailed PPI Report This PPI report is the most thorough monthly report on producer prices available. It includes text, tables, comments, and special articles, as well as aggregate industry and commodity level indices. The Detailed Report is made available on the PPI website at the same time as the news release.

Concentrate on prices and spending, as well as looking beyond the numbers. PPI data analysis and short, instructive pieces are included in these quarterly releases.

Databases accessible over the internet. The BLS LABSTAT databases provide electronic access to current and discontinued historical PPI data in html, text, and Excel formats. The PPI Data Retrieval Guide provides instructions for getting PPI data from the BLS website.

When are PPI data made available?

PPIs are released on a monthly basis. The following month of reference, usually during the second full week, has the first-released data for a particular month, as well as recalculated indexes (final figures) for the indexes published four months previously. PPIs for July 2013 were first published on August 14, 2013, and final indices for March 2013 were announced on August 14, 2013. The first-published indices for August and recalculated statistics for April were issued in September 2013. On the dates specified in the onlinerelease calendar, data is posted immediately after 8:30 a.m.

What does the Final Demand-Intermediate Demand system measure?

The FD-ID system’s final demand component measures price changes for commodities sold for personal consumption, capital investment, government, and exports from the producer’s perspective. Final demand products, final demand trade services, final demand transportation and warehousing services, final demand services excluding trade, transportation, and warehousing, final demand construction, and total final demand are the six key price indexes that make up the system.

The FD-ID system’s intermediate demand component tracks price changes for goods, services, and construction supplies sold to enterprises as inputs to production, but not for capital investment. Two parallel treatments of intermediate demand are included in the system. The first treatment categorizes intermediate demand commodities into six price indexes: unprocessed intermediate demand goods; processed intermediate demand goods; intermediate demand trade services; intermediate demand transportation and warehousing services; intermediate demand services less trade, transportation, and warehousing; and intermediate demand construction. The second technique divides intermediate demand commodities into production phases with the stated purpose of building a production and price change forward-flow model. Price transmission throughout stages of production and final demand can be studied using these indices. This system is designed to enhance forward production flow between stages while decreasing backward production flow. Intermediate demand stage 1, intermediate demand stage 2, intermediate demand stage 3, and intermediate demand stage 4 are the four main indicators in the production flow treatment.

The Relative Importance Tables portion of the PPI webpage has weights for commodities components of the FD-ID indexes.

A summary of the FD-ID system is also available on the PPI website. See “A novel, experimental system of indexes from the PPI program” (PDF) in the February 2011 Monthly Labor Review for a thorough explanation of the FD-ID system’s design, or go to the FD-ID Aggregation system web page. The PPI chapter of the BLS Handbook of Methods has more information on the entire PPI approach.

Why did the PPI switch from the Stage-of-Processing to the FD-ID system?

What does a rise in PPI mean?

Let’s have a look at the three components of the PPI. For many products and services, the prices included in the PPI are from the first transaction.

Commodity Index: This indicates the average price change for commodities such as energy, coal, crude oil, and steel scrap during the preceding month.
Goods in this stage of processing have been manufactured to some extent, but will be sold to other manufacturers to complete the finished product. Lumber, steel, cotton, and diesel fuel are examples of SOP products.

As previously stated, the industry index is the finished stage of a product that is most typically sold to a retailer the grocery store.

Any change in producer pricing, particularly for the above-mentioned industry index, will be a leading predictor of whether consumers would pay more or less, and whether inflation increased costs of goods is a concern or not. Consumers will pay more when they buy if producer prices are higher, whereas consumer prices will likely be lower at the retail level if producer costs are lower. The CPI report tracks consumer prices on a monthly basis.

Low inflation is beneficial to the economy since it boosts consumer spending while also increasing business earnings and stock prices.

Commodity prices fluctuate from month to month, but food and energy costs, which account for about a quarter of PPI numbers, are the most volatile. That’s why looking at changes in PPI numbers over a three- to five-month period is preferable. According to analysts, the easiest way to measure the PPI is to compare it to the same month the prior year, hence the February 2013 statistics should be compared to February 2012.

The Bureau of Labor Statistics, which is part of the Department of Labor, collects the data. The second week of each month, reports are produced that reflect the previous month’s results. As a result, data from September is included in a report produced in October.

Here’s an example of a January 2012 PPI report: “In December, the Producer Price Index for completed products fell by 0.2 percent. In November, finished goods prices declined 0.8 percent, after falling 0.2 percent in October. In December, prices for finished products, excluding food and energy, increased by 0.1 percent.”

PPI data, like many other government statistics, is frequently updated throughout time, usually within three months of its initial release.

What will be the PPI in 2021?

The producer price index, which measures wholesale prices for goods and services, rose 0.2 percent in December, missing expectations of 0.4 percent. The 9.7% increase in 2021 was the most on record in records dating back to 2010.

What impact does PPI have on currency?

There is always a trade-off when it comes to money: people can save money and earn interest, or they can spend money right away and avoid paying interest.

If PPI rises, interest rates are likely to climb as well. When interest rates rise, saving money becomes more appealing since the payoff (interest) is more than before. Spending money instead of saving becomes more expensive since customers lose out on the higher interest rate if they choose to spend rather than save. As a result, higher PPI could lead to higher rates and a stronger currency.

What is the difference between WPI, CPI, and PPI?

The Producer Price Index, or PPI, is a price movement index calculated from the seller’s perspective. It’s one of the most widely used price indexes, alongside the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) (WPI).

What is covered by PPI?

Mining, manufacturing, agriculture, fishing, forestry, natural gas, power, construction, garbage, and scrap materials are among the industries that make up the PPI. Imports are not included in the PPI since it is designed to measure the output of US producers.

What does PPI signify in the context of healthcare?

PPIs (proton pump inhibitors) are medications that function by lowering the amount of stomach acid produced by glands in the stomach lining.

When the PPI is higher than the CPI, what does this mean?

The direction and size of price increases in the Producer Price Index (PPI) are sometimes considered to predict or parallel similar changes in the Consumer Price Index (CPI) for All Items. When real index changes violate this assumed link, many data users wonder why the PPI and CPI exhibit distinct price fluctuations.

The answer is that discrepancies in price movements between the PPI and the CPI are due to conceptual and definitional differences between the two measuresdifferences that are consistent with their applications. The PPI is primarily used to deflate revenue streams in order to calculate real production growth. The CPI is primarily used to modify income and expenditure streams in response to changes in the cost of living. The various applications lead to definitional variances that can be divided into three categories: scope and coverage, classification, and other technical distinctions.

The Personal Consumption PPI, a significant component of Final Demand within the PPI’s major aggregation model, the Final-Demand-Intermediate Demand system, is the index that most closely matches with the CPI for All Items. The PPI for personal consumption measures changes in manufacturer selling prices for consumer foods, consumer energy items, consumer durable goods, and consumer nondurable goods other than food and energy. The Personal Consumption Index tracks changes in prices received by services producers for private passenger transportation, personal consumption goods transportation and warehousing, wholesale and retail trade in personal consumption goods, and services other than trade, transportation, and warehousing sold to individuals. The U.S. city average of the All Items CPI for All Urban Consumers (CPI-U) gauges the average change in prices paid by urban consumers for goods and services.

More information about the PPI FD-ID system may be found by going to the FD-ID Aggregation System homepage or by reading A novel, experimental system of indexes from the PPI program in the February 2011 issue of the Monthly Labor Review. The PPI methodology is documented in length in the BLS Handbook of Methods’ PPI chapter, and the CPI methodology is documented in equal detail in the Handbook’s CPI chapter.

Scope and coverage

All marketable output sold by domestic producers to the personal consumption sector of the economy is included in the scope of the PPI for personal consumption. The private sector creates the majority of the marketable production sold by domestic producers; nevertheless, the government produces some marketable output that is included in the PPI’s scope. Unlike the PPI, the CPI covers products and services offered by businesses and governments when explicit user prices are assessed and the goods or services are paid for by consumers.

Owners’ equivalent rent is the most strongly weighted item in the All Items CPI, accounting for roughly 24% of the overall index. The implicit rent that owner occupants would have to pay if they rented their homes is included in the CPI to represent the cost of shelter for owner-occupied housing units. Because owners’ equivalent rent is not a domestically produced, marketable output, the PPI for personal consumption excludes it.

Imports are treated differently in the PPI for personal consumption and the CPI. Imports are included in the CPI since it covers goods and services purchased by domestic consumers. Imports, on the other hand, are excluded from the PPI because they are not produced by domestic enterprises by definition. Imports account for a significant amount of the CPI, particularly in the clothes and new-cars components, and their inclusion in the CPI against their absence from the PPI for personal consumption results in a significant disparity between the two indexes.

Only components of personal consumption that are directly paid for by the consumer are included in the CPI, whereas components of personal consumption that are not paid for by the consumer are included in the PPI for personal consumption. For example, medical services paid for by third parties such as employers or the federal government are included in the PPI for personal consumption. The CPI, on the other hand, only covers payments made directly by patients for medical services. Medical care services accounted for 23.1 percent of the PPI for personal consumption in December 2011, but just 5.3 percent of the All Items CPI.

For services with an interest rate component, there is a final variation in scope between the PPI and the CPI. Changes in interest rates or interest charges are not included in the CPI’s scope. Services with an interest rate component, such as banking and insurance, are included in the CPI’s scope, but the interest rate component of these services is not included in the index. The PPI’s coverage also covers services with an interest rate component in their pricing, however this index does not include the interest rate component of those prices. Banking services make up about 4% of the PPI for personal consumption, while insurance services make up 3.8 percent. Interest rate fluctuations will affect price indices for banking and insurance in the PPI. Some financial services, such as ATM fees, and many insurance services are included in the CPI; however, the interest rate component of these services is not included. As a result, changes in interest rates have no effect on the CPI.

In contrast to the CPI, the PPI currently lacks comprehensive service coverage. The Bureau began expanding PPI coverage outside mining, manufacturing, agriculture, and utilities in the mid-1980s, and in 1985, it introduced its first services pricing index. The drive to expand coverage into the economy’s services sector is still ongoing. According to 2007 Census revenue statistics for the sector, the PPI presently covers about 72 percent of services. Because the PPI does not cover all services, the CPI includes a number of services that are not covered by the PPI for personal consumption. Residential rent, which accounts for around 6.5 percent of the CPI, and education services, which account for little more than 3 percent of the CPI, are two of the most important of these services.

Categorization

Within their index systems, the PPI and the CPI categorize a variety of commodities and services differently. At high levels of aggregation, differences in categorization for products and services are reduced, but at lower levels, they can cause disparities. Utilities, such as electricity and natural gas, are included as products in the PPI, whereas utilities are classified as services in the CPI. The PPI for personal consumption and the CPI both contain utilities, but the PPI for personal consumption services excludes utilities while the CPI for services does, making the two services indexes less similar than the overall indexes.

The PPI and the CPI categorize and treat commerce and transportation in different ways. The PPI classifies commerce and transportation as services and isolates the expenses of carrying, retailing, and wholesaling commodities from the cost of the good itself. The value of the good, the cost of delivering the good, and the trade margins involved with the sale of the good are often included in prices for goods as measured by the CPI.

Other technical differences

Between the PPI for personal consumption and the CPI, there are also more technical distinctions. The PPI and the CPI both employ a modified Laspeyres index formula to calculate weights, but the CPI updates weights every two years and the PPI updates weights every five years. At the item level, the CPI uses a geometric mean calculation that the PPI does not. In periods of price increases, the geometric approach decreases substitution bias, resulting in lower inflation measurements. The PPI collects prices for a single day of the month (the Tuesday of the week containing the 13th), whereas the CPI collects prices for the entire month. Finally, prices calculated using the CPI include sales and excise taxes, whereas prices calculated using the PPI do not.