How Consumer Price Index (CPI) and the Producer Price Index (PPI) are related and how/when PPI’s affect have impact on CPI?

19 views
0

How Consumer Price Index (CPI) and the Producer Price Index (PPI) are related and how/when PPI’s affect have impact on CPI?

In: 1

CPI reflects price of goods that consumers buy, PPI — the goods that producers buy, such as raw materials, supplies, equipment.

If producers have to pay more for their inputs, they will have to increase price that charge to consumers. So the most direct effect is that increase in PPI will soon cause an increase in CPI.

If PPI drops, producers could reduce prices they charge to consumers, but they do not like to do that, and will not do it unless they face competition from other producers. There is also an issue of inventory cost: buying new materials might be cheap, but producers already have expensive materials in their warehouse, so they want to recover the cost of those materials.

Over long term, increase in CPI will make workers demand higher salaries, which will increase producer prices, i.e. the PPI. This is a very indirect and slow effect.