ECONOMICS MACROECONOMICS
Consumer Price Index vs. Producer Price Index: What's the Difference?


By
SARRAH SHAHUpdated Dec 15, 2020
Consumer Price Index (CPI) vs. Producer Price Index (PPI): An Overview
The consumer price index (CPI) and the producer price index (PPI) are economic indicators. Although both quantify price fluctuations for goods and services, they differ in the composition of their target sets of goods and services and in the types of prices collected for those different goods and services.
KEY TAKEAWAYS
Consumer Price Index
The target set of goods and services evaluated in the Consumer Price Index (CPI) are expenditures of domestic and internationally imported consumer-related services for residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, the retired, as well as urban wage earners and clerical workers. The CPI does not include rural or non-metropolitan areas, farm families, people in the armed forces, and those in institutions, such as prisons and mental hospitals. The CPI measures food and beverages, housing, apparel, transportation, medical care, recreation, education, communication, and other personal goods and services such as tobacco and smoking products, haircuts, and funerals.
In April 2021, the Consumer Price Index increased 0.8% on a seasonally adjusted basis after rising 0.6% in March. When compared to the year prior, the full index increased 4.2%, making it the largest 12-month increase since September 2008.1
Producer Price Index
In contrast, the producer price index (PPI) measures the average change in the sale prices for the entire domestic market of raw goods and services. These goods and services are bought by consumers from their primary producers, bought indirectly from retail sellers, or purchased by producers themselves. The industries that comprise the PPI include mining, manufacturing, agriculture, fishing, forestry, natural gas, electricity, construction, waste, and scrap materials. As the PPI is meant to evaluate the output of U.S. producers, imports are excluded. The U.S. Bureau of Labor Statistics reports that 10,000 PPIs for individual products and groups of products are released every month.2
Special Considerations
The types of prices collected for the targeted goods and services of the PPI differ from those of the CPI. As the PPI evaluates the revenue received by its producer, it does not include sales and excise taxes in the price because these do not represent revenue to the producer. The CPI, however, does include sales and excise taxes because these factors affect the prices of the goods or services, which directly impacts the consumer as it increases or decreases the sale price.
Also, the CPI is one of the leading economic indicators of inflation as it calculates the change in cost of a bundle of consumer goods and services over time. A higher sale price indicates a decrease in consumer purchases and a rise in inflation, which eventually leads to adjustments in income and the cost of living. The PPI serves as a leading indicator for the CPI, so when producers face input inflation, the increases in their production costs are passed on to the retailers and consumers. The PPI also serves as a true measure of output in that it is not affected by consumer demand.
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Related Terms
Consumer Price Index (CPI) Definition
The Consumer Price Index measures the average change in prices over time that consumers pay for a basket of goods and services. more
Producer Price Index (PPI) Definition
The producer price index (PPI) is a family of indexes that gauges the average fluctuation in selling prices received by domestic producers over time. more
Market Basket
A market basket is a subset of products or financial securities designed to mimic the performance of a specific market segment. more
What Does Farm Price Index (FPI) Mean?
The Farm Price Index is an economic indicator measuring the prices received by farmers for the sale of crops and livestock. more
Inflation
Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy. more
The Meaning of the Economic Term Basket of Goods
A basket of goods is defined as a constant set of consumer products and services valued on an annual basis and used to calculate the consumer price index (CPI). more
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