The consumer price index (CPI) measures the cost of a fixed bundle of consumer goods relative to the cost of those same goods in a chosen reference year. Inflation is the percent change in the index from one year to the next and reflects how prices are changing for consumers.

The producer price index (PPI) is a similar construct that measures the price that producers get for their wares. It was formerly called the wholesale price index (WPI). Because many of these goods are intermediate goods and thus inputs to the production of final consumer goods, one might hypothesize that changes in the PPI could forecast future changes in the CPI.

The FRED graph above shows recent movements in these two series (January 2015 to present). Both series have grown at a fairly constant rate over the medium term. Moreover, after an initial dip at the start of the COVID recession, the PPI has risen sharply. Does this mean that future CPI inflation is imminent?

While it’s certainty possible that changes in the PPI are passed through to the CPI, economists have found that the former generally does not forecast the latter (see Clark, 1995). What does the sharp increase in the PPI mean for consumer prices? Only time will tell.

How this graph was created: From the FRED main page, search for and select the data series “Consumer Price Index for All urban Consumers: All Items in U.S. City Average”. From the “Edit Graph” panel (orange button), use the “Add Line” tab to search for and select the data series “Producer Price Index by Commodity: All Commodities.” Using the sliding blue bar at the bottom of the graph (or the date entry boxes in the top right hand corner), adjust the timespan to your desired date range.

Suggested by Michael Owyang.