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A whole bunch of inflation data comes out this week, because the Bureau of Labor Statistics puts out its inflation reports in pairs: the consumer price index (CPI), followed by the producer price index (PPI).
The CPI is easy to understand: It measures how much consumers are paying for stuff.
PPI is a little more complex. It’s often described as "inflation at the wholesale level." But that's only part of the story, because it measures inflation in the prices that businesses are charging all buyers
— whether it's other businesses or consumers.
Both CPI and PPI are running hotter than the Federal Reserve's 2% target, but producer prices are rising faster than consumer prices — but what happens in the PPI doesn’t always stay in the PPI.
Part of the reason why the consumer and producer price indexes have been moving up at different rates is because they measure different things.
“One of the big things is rent,” said Menzie Chinn, an economics professor at the University of Wisconsin-Madison. “That’s a very big component of the CPI, and that’s not showing up in the PPI.”
“What’s happening there, which is not at all incorporated in PPI, can drive a wedge between the two series,” Chinn said.
All that weight the consumer price index puts on rent also means CPI isn’t as affected by the cost of fuel.
“Consumers spend a lot of their budget on housing,” said Laura Veldkamp, an economics professor at Columbia Business School. “And housing doesn’t respond so quickly to the price of fuel.”
Veldkamp said the producer price index is much more sensitive to energy costs, because fuel is such an important part of what producers do.
That added pressure puts businesses in a tough spot, according to Matthew Miskin, co-chief investment strategist with Manulife John Hancock Investments.
“They either get lower profit margins, or they have to pass this on to consumers,” Miskin said. “And the question becomes, ‘Can consumers take on that higher price point?’” |