CPI vs PPI
Consumer prices vs producer prices — the leading indicator dynamic
- Tell CPI from PPI and explain what each measures
- Understand why PPI often leads CPI by months
- Use PPI as an early signal for the next CPI direction
CPI gets all the headlines. PPI gets ignored. Yet PPI tells you what CPI will print in three months. Reading PPI carefully is one of the cheapest edges in macro.
Two indices, two stages of the supply chain
CPI (Consumer Price Index) measures what households pay. PPI (Producer Price Index) measures what businesses pay for inputs and what they charge wholesale. PPI is upstream — when input costs rise, producers eventually pass them on to consumers via higher CPI.
Downstream. Lagging. What you see in shops + bills. The number markets and politicians focus on.
Upstream. Leading by ~1-3 months. What businesses charge each other. Often predicts CPI direction before CPI itself prints.
Using PPI as a CPI signal
When PPI accelerates while CPI is flat, expect CPI to follow within months — pass-through eventually happens. When PPI rolls over but CPI is still hot, it's an early signal that the inflation wave is breaking. 2022's CPI peak was preceded by PPI peaking 2 months earlier — alert traders saw it coming.
Headline CPI prints 4.5% (in-line). PPI surprises to the downside at 2.1% (vs 3.0%). Likely USD reaction over the following weeks?
- CPI = consumer prices (downstream)
- PPI = producer prices (upstream, leading)
- PPI often leads CPI by 1-3 months
- Watching PPI gives you an early read on CPI direction
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