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Posts tagged with: "PPIACO"

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Does oil drive inflation?

A look at oil's influence over producer prices vs. consumer prices

The price of oil has declined recently, but does that mean prices overall have declined? Let’s see if FRED can help us measure how much connection there is between oil prices and the general price level. The graph above compares oil price inflation and overall price inflation in the U.S. over recent decades. The red and blue lines plot the year-to-year inflation rate corresponding to two of the major aggregate price indexes: the producer price index (PPI) and the consumer price index (CPI). The green and purple lines plot the year-to-year percentage change in two of the major global oil price indexes: the price of Brent crude and the price of West Texas Intermediate (WTI) crude.

The graph shows a strong positive relationship between oil prices and PPI inflation: That is, higher oil prices are associated with higher producer prices and vice versa. Specifically, the correlation between oil prices and the PPI is 0.71. This strong link likely comes from the importance of oil as an input in the production of goods. In contrast, the graph shows a positive but much weaker relationship between oil prices and CPI inflation: The correlation is 0.27, much lower than for producer prices. This weaker link between oil prices and consumer prices likely comes from the relatively higher weight of services in the U.S. consumption basket, which you’d expect to rely less on oil as a production input. If you know what to look for, this difference in correlation is more clearly visible in the scatter plot below: The red dots (PPI and oil) more or less follow a 45-degree line that rises from left to right, which translates into a strong positive relationship between PPI and oil prices. The stream of blue dots (CPI and oil) doesn’t strictly follow a 45-degree line, which reveals a much weaker relationship.

How these graphs were created: Search for “CPI” and click on the series name. From the “Edit Graph” panel, open the “Add Line” tab and search for “PPI,” then click on the series name. Repeat this procedure searching for “oil price” to add the remaining series. From the “Format” tab: Set the “y-axis” position corresponding to the oil price series to “right,” set the “Graph frame” color to white, and set the thickness of each of the lines to 3. For the second graph, from the “Format” tab, change the graph type to “Scatter.”

Suggested by Fernando Leibovici.

View on FRED, series used in this post: CPIAUCNS, POILBREUSDQ, POILWTIUSDQ, PPIACO

Is the PPI going crazy?

The graph above shows the producer price index since 1913. It measures the cost of items used in the production process and is thus different from the consumer price index, which measures the cost of final goods to consumers. Two aspects of the graph are striking: Prices have increased quite a bit since 1913, and prices in recent years seem to be subject to wild fluctuations. There’s no doubt the ups and downs of commodity prices such as oil and metals have an effect here, but are the recent years really as wild as they look?

In part, the second observation is a consequence of the first. Prices now are roughly 18 times greater than those in 1913. So a 1% increase will look 18 times larger now than before. This “optical illusion” can be fixed in two ways. 1. Look at percent changes. The first graph below shows these changes from the same month a year before, which takes care of any potential seasonal effects. Recent fluctuations are indeed somewhat larger than in preceding decades, but they’re nowhere close to the large fluctuations in the first years of the series. 2. Look at natural logarithms. The second graph below includes a transformation so that any change in the series looks the same in relative terms: that is, a 1% increase looks the same in 1913 and 2015. Again, we see that the fluctuations were much larger in the early years.

How these graphs were created: Search for and select the PPI for the first graph. Change the units to “Percent Change from Year Ago” and you have the second graph. For the third graph, start with the first graph, choose “Create your own data transformation,” and select “Natural Log” among the transformations.

Suggested by Christian Zimmermann

View on FRED, series used in this post: PPIACO


The producer price index (PPI) is one of the oldest continuously recorded statistics in the United States. While the better-known consumer price index (CPI) computes the price of a basket of consumer goods in retail stores, the PPI looks at raw materials, intermediate goods, and goods ready to be shipped. In fact, it was previously known as the wholesale price index (WPI). FRED offers the PPI in all sorts of decompositions, over 10,000 series in total.

In the graph, we compare the CPI with the PPI. Notice that the PPI appears to be more volatile, at least in recent years, and the two indexes tracked each other much better before the 1980s than since. In particular, the PPI has increased much less than the CPI and has seen some dramatic drops.

How this graph was created: Search for PPI, and the index for all commodities will likely be your first choice. Add that series to the graph. Then add the CPI by searching for it in the “Graph” tab through the “Add Data Series” panel.

Suggested by Christian Zimmermann

View on FRED, series used in this post: CPIAUCSL, PPIACO

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