CPI and PPI – a Discussion

The news media usually focuses on the monthly CPI numbers (Consumer Price Index)  posted by the U.S. Department of Labor’s Bureau of Labor Statistics – the number usually makes the newspaper and news show headlines but what that number really tells us is what has already happened in the marketplace. We, as consumers, already paid those prices that are reflected in the CPI.

What we prefer to study is the PPI (Producer Price Index) – these are the prices that manufacturers and producers have paid for ingredients and other production expenses and in most cases those prices are not yet reflected in what consumers are paying.

Sometimes the PPI reflects a higher inflation number than might be seen in the  CPI a few months later because manufacturers have decided to either delay or forego a price increase for fear of consumer backlash or the retailers (restaurants included) have decided to “eat” the increased costs. But over the long-term, price increase eventually must be passed on – after all, a bottom line profit is something all of us have a responsibility to produce to our owners or stockholders.

Over the years, the federal government has changed the composition and definition of the CPI. The reasons for change are not political as they have happened under administrations of both parties and the changes make sense but tend to skew any comparison of results to previous years. Brett Ayers of The Wall Street Journal recently wrote a story on inflation in which he quoted John Williams of Shadow Government Statistics who said that if we measured inflation like we did during the Jimmy Carter presidency, today’s inflation rate would be closer to 10%.

The 2/17/11 CPI for January, 2011 showed a Core inflation (excluding food and energy) of .2% vs. the overall inflation number of .4%. For January, cost of food at home rose by .7% while food consumed away from home rose by .2% This is noteworthy for those for you considering instituting menu price increases – consumers already experienced significant grocery store inflation in January of .7% so they are being conditioned for other food price increases.

PPI is made up of 3 distinct categories of the manufacturing pipeline: Finished Goods (goods ready for sale but not yet sold), Intermediate Goods (goods that are partially finished) and Crude Goods (ingredients or components that have not begun to be processed). Obviously, consumers will see Finished Goods first on the shelves or on tables and they will see Crude Goods last.

Here is the inflation that was reported for January for food for the 3 categories:

Finished Goods: +.3%

Intermediate Goods; + .4%

Crude Goods: +4.3%

From above data, it certainly appears that rising commodity, fuel and other energy costs are reflected in all three phases of the production process but are emphatically seen in the Crude Goods number.

If manufacturers and retailers pass along price increases to consumers, in the coming months, we will eventually see the CPI become more reflective of what we are currently seeing in the PPI.

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