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.
We recently discussed some CPI categories that do not tend to have rising prices. Those examples were all linked to information technology. Here’s a wide variety of categories where prices can decrease or remain stable for long periods. For example, coffee is subject to wide fluctuations, including steep price drops. Apparel became disconnected from the CPI sometime in the early 1990s and remains largely constant. It is more surprising that cosmetics and musical instruments are also consistently below general inflation or even flat. In the motor vehicles category, some quality improvements only partially affect the overall price of motor vehicles; this is another example, much like computers, of a category that does not closely follow the overall path of the CPI.
How this graph was created: Start with the graph for the CPI, then add the other series. Change the color of the CPI line to black and thicken it to distinguish it from the many other series.
Suggested by Christian Zimmermann
Most people recognize the CPI (consumer price index) as a common measure of U.S. inflation. But the CPI sometimes seems at odds with the personal experiences of some consumers, who often point out that particular goods have become more expensive than the CPI seems to imply. This incongruity occurs mostly because the CPI is an index that covers many products; the variations in prices are averaged out when forming the aggregate CPI. Case in point: We show here how price fluctuations increase as the range of products narrows. The graph shows the inflation rate for the CPI covering all items (blue line), which is quite stable. But compare this with energy prices (red line), which fluctuate wildly. Narrow down energy prices to just gasoline (green line) and you find even more volatility. CPI data even include particular types of gasoline for particular regions, which display even more volatility (purple line). It is true that the volatility of energy prices is most stark, but similar trends do appear for other categories as well.
How this graph was created: Search for the various series and add them to a graph. Change each series to “Percent Change from Year Ago” and adjust the sample to eliminate the years where only the all-items CPI was available.
Suggested by Christian Zimmermann.
View on FRED, series used in this post: