CPI vs PPI
The two inflationary measures in our economy, the Consumer Price Index, known as CPI, and the Producer Price Index, known as PPI.
Key Takeaways:
PPI measures the costs of producing consumer goods.
CPI is a measure of the total value of goods and services consumers have bought over a specified period.
The two inflationary measures in our economy are: the Consumer Price Index known as CPI, and the Producer Price Index known as PPI. The change in the price of goods affects all of us from purchasing common goods such as milk and eggs, all the way to the big ticket items like a house, which are highly sensitive to interest rates.
Unlike many other economic indicators, such as PMI, confidence surveys, and GDP, the inflation related data is one of the few releases that directly applies to the daily cost of living.
Both PPI and CPI are considered key data releases, meaning the monthly indicator is heavily scrutinized by traders, since it is used by the Federal Reserve to assess developments in the economy.
The Federal Reserve is a dual mandate and central bank. That means it is under considerable pressure to balance two major economic factors: inflation and the jobs market.
As a result, any unexpected fluctuations in leading economic indicators are often referenced by members of the Fed during speeches or public events in order to manage market expectations.
In essence, CPI is a measure of the total value of goods and services consumers have bought over a specified period. At the same time, PPI is a measure of inflation from the perspective of producers.
Essentially, PPI measures the costs of producing consumer goods. And since commodity and food prices directly affect retail pricing, PPI is seen as a good pre-indicator of inflationary pressures.
Despite being a complex report, traders can prepare for the release in several ways:
First, by using information from various confidence and PMI reports, you can gauge price developments faced by both consumer and producers over the past month.
The retail sales report is also considered to be a vital pre-inflationary indicator.
Monitoring energy prices and the general commodity outlook also helps to correctly position traders ahead of the release.
If there are large swings in the commodity prices, the market will most likely focus on the PPI core reading as the most reliable statistic.
As a general rule, the Federal Open Market Committee implements monetary policy to help maintain inflation rates of somewhere around 2% over the medium term. If the PPI or CPI numbers remain above this level, the Fed may deem it to be threatening to the country, which then can lead to an increase in the interest rates in order to rein in the rising prices.
On the other hand, an extended period of low or even negative inflation means that the central bank would consider actions to stimulate the economy by either cutting interest rates or embarking on quantitative easing, or QE.
There are a number of factors to think about when trading US CPI and PPI, but with thorough preparation and a little insight this release is an event that offers numerous opportunities for traders.