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CPI

The Consumer Price Index (CPI) is an index reflecting changes in the price of consumer goods and services purchased by households.

The index is generally used to judge the level of inflation. Generally, when the CPI increases above 3%, it is considered to be in inflation territory. (Note: 3% is the corresponding month of the previous year). Too high a CPI suggests inflation risks, but too low is not all good.

At present, many countries in the world attach great importance to this issue. The Federal Reserve also takes CPI as a regular reference index, which is used to measure and warn against domestic inflation factors.

However, the degree of control over the CPI varies from country to country. For example, China’s CPI is generally capped at 3% year-on-year for the month. In the United States, the CPI in 2022 reached 7.9 percent, a 40-year high.

Simply put, the CPI is a measure of how much prices are rising.

Here’s an example:

In March 2021, Jack would pay $8 for a burger. Assuming that CPI increases 4% year-over-year in March 2022, Jack would pay $8.32 for the same burger today, an increase of $0.32. 【8* (1+4%) 】

There are two things you should note:

  1. CPI reflects the goods that people buy and use for consumption. It does not include investment goods, such as houses, agricultural means of production, etc.
  2. CPI reflects the current price level relative to a certain period of rise or fall, not the absolute level of prices. That is to say, the current high CPI increase does not mean that the absolute price of consumer goods is high.

PPI

The producer price index (PPI) reflects the change trend and degree of producers’ purchase of intermediate commodities and raw materials in a certain period, including the ex-factory price index of industrial products and the industrial intermediate input price index.

PPI covers fuel and power, ferrous metals, non-ferrous metals, chemical raw materials, wood and pulp, building materials, agricultural and sideline products, and textile raw materials. The National Bureau of Statistics (NBS) calculates PPI by classifying these goods into different weights.

When the year-on-year growth rate of PPI is positive, it indicates that the industrial products of upstream enterprises have been sold out and can be sold at a higher price. At this time, the operating condition of upstream enterprises is relatively good.

If the PPI growth rate is negative for a long time, it means that the revenue of upstream enterprises is declining. In the long run, enterprises will close down and employees will be laid off, which is bad for the whole economy.

Simply put, PPI represents the average cost of goods produced by social enterprises.

Here is an example:

Peter, the burger shop owner, sells 20,000 burgers a month; it costs $4,000 a month to buy the ingredients for the burgers.

Suppose the price of raw materials goes up in April. Peter would have to pay $5,000 for the same amount of raw materials. In this case, PPI is in a state of decline, or the growth rate is negative.

In other words, Peter’s business pressure is relatively high, which may lead to the price increase of hamburgers.

The National Bureau of Statistics releases PPI every month, and PPI is usually discussed when it comes to changes in the CPI.

PPI is production, CPI is consumption, obviously, production first, then consumption, so PPI is the precursor of CPI.

Generally, price fluctuations will first affect the production end, that is, PPI data; from the industrial chain to the downstream diffusion, finally reflected in the consumer’s clothing, food, housing, and transportation.

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