The CPI and PPI track changes in consumer prices and revenue streams, but differ in their focus and data collection methods. They can be used together to provide a more comprehensive picture of the market, but do not always match up accurately.
The consumer price index (CPI) and the producer price index (PPI) determine changes in consumer prices of goods and services. PPI tracks prices of household goods from the seller’s perspective. CPI uses a weighted average to determine the price of a group of goods. While 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.
Both CPI and PPI adjust revenue streams 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, albeit sometimes overlapping, areas, they can be used together to provide the analyst with a more comprehensive picture of the market. One tracks the cost of living, while the other covers what the market is producing. Using both indices, it is easier to determine the cause and effect cycle that drives the market.
CPI and PPI also track consumer activity, albeit in different ways. While CPI covers business and consumer purchases, PPI focuses on customer activity only. The former covers a wide area, while the latter focuses on goods purchased by customers in urban areas.
Some analysts and investors also believe that the direction the market will go can be determined by looking at the CPI and PPI. PPI is thought to predict the path of CPI. While this occasionally appears, the type of information included in each index and the way the data is collected are too different to provide an accurate match. This means that even when similar types of activities are studied, they do not necessarily appear in the same way in the indices.
The CPI and PPI also contain household goods, although they treat them differently. 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 every product consumed.
There are several ways in which PPI and CPI diverge as well. One significant variation is that information for the PPI is collected monthly, while the CPI is tracked for two months before being updated. Things like sales and excise taxes and distribution costs also differ between the two indexes.
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