What are the CPI and PPI?

Inflation shapes many aspects of our economy, from how much you pay at the grocery store to the returns on your portfolio. Two gauges used to analyze it are the Consumer Price Index and the Producer Price Index, and in this blog post, I will help you understand what they are, how they’re different, and why it’s crucial to know.

What is the CPI?

The CPI tracks the average change in retail prices consumers pay for multiple categories of goods and services, making up the market basket. It’s the headline measure of inflation and guides the Fed on its rate decisions. It includes things like transportation, housing, food, medical care, and many more.

Above is a bar chart from the NY Times depicting inflation by area for the last month’s report. As you can see, it tells us what we’re now paying more for as well as what costs less.

What is the PPI?

On the other hand, PPI measures price changes at the wholesale or producer level, capturing what domestic producers receive for their output. It’s based on thousands of price quotes from manufacturers and other providers. Additionally, unlike CPI, it includes export prices and excludes imports and investment goods. The PPI is also unique because it can act as an early warning sign, as rises often precede consumer inflation, since it means cost pressures could be passed on to consumers.

Why Both are Important for Investors

For us investors, CPI and PPI are not just numbers, but important tools that shape expectations around interest rates, profitability, and the assets we choose. When the CPI rises, central banks like the Fed may tighten monetary policy, affecting bond yields and sector performance. For example, the CPI especially affects rate-sensitive sectors like real estate and utilities since adverse reports leading to higher rates cause greater borrowing costs, meaning consumers become less inclined to spend money there. Similarly, PPI offers early insight into cost pressures that can affect supply chains and corporate margins, influencing the stocks you choose and the sectors you look into. Take sectors like consumer staples and industrials, for instance. Since they’re heavily exposed to manufacturing costs and commodity prices, a negative PPI report could mean they’re experiencing pressures on their profit margins, which could change our short-term outlook on them as investors.  

So, it’s important for investors to understand that CPI and PPI are correlated and you should use both in creating a strategy. This can help you anticipate economic shifts, hedge against inflation, and position your portfolio to navigate evolving market conditions with greater confidence.

Disclaimer:

This blog post is for educational and informational purposes only. It is not financial advice. I am not a licensed financial advisor, and nothing in this post should be interpreted as a recommendation to buy or sell any securities. Trading involves risk, and results are not guaranteed. Past performance is not indicative of future results. Always do your own research and consult with a licensed financial professional before making any investment decisions.