PPI Vs. CPI

The producer price index (PPI) measures the prices of output from producers. The PPI is a leading indicator for the consumer price index (CPI). As producers see their output costs go up, they will pass these costs on to the consumer. As producers can't pass on all of their costs to the consumer, there is a delay of a few months between the PPI and the CPI.

There are two measures for inflation CPI and PCED. The PCE Price Index is preferred by the Federal Reserve because it is composed of a broad range of expenditures. Another difference between the PCE Price Index and CPI is that the PCE Price Index is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI.

The 10 year break-even inflation rate = 10 year bond - 10 year tips. It represents a measure of expected inflation and is a leading indicator for the CPI.

The CPI and PCE are both important indicators of U.S. inflation. While CPI is more important from the perspective of an individual, PCE is more important from the perspective of monetary policy. 

The CPI and PCE do not cover identical categories of personal spending. The PCE has a broader scope than the CPI, as it captures the expenditures by both rural and urban consumers. Unlike the CPI, the PCE includes expenditures from non-profit institutions that serve households.

The Fed has given preference to PCE due to its broader scope and “chained base” for calculations.

Segments contributing to inflation can be found at the Truflation website.