The PPI-CPI Disconnect

In the past couple of days we have more evidence of the disconnect between the bullish producers and the bearish consumers.  In essence producers bid up their input prices so they can build inventory for the bull market they know is coming and yet we see weak consumer demand is holding down consumer prices.

The information below is from the Deptartment of Labor:

“It is sometimes assumed that the direction and magnitude of price changes in the Producer Price Index (PPI) will anticipate or parallel similar changes in the Consumer Price Index (CPI) for All Items. When this assumed relationship is contradicted by actual index changes, many data users ask why the PPI and CPI show different price movements.

The answer is that conceptual and definitional differences between the PPI and CPI—differences which are consistent with the uses of the two measures—contribute to the differences in their price movements. A primary use of the PPI is to deflate revenue streams in order to measure real growth in output. A primary use of the CPI is to adjust income and expenditure streams for changes in the cost of living. The different uses result in definitional differences that can be categorized into three critical areas: (1) scope and coverage, (2) categorization, and (3) other technical differences.

Within the PPI, the index that most closely aligns with the CPI for All Items is the Personal Consumption PPI, a substantial component of Final Demand within the PPI’s primary aggregation model, the Final-Demand-Intermediate Demand system. In terms of goods, the PPI for personal consumption tracks changes in manufacturer selling prices for consumer foods, consumer energy goods, consumer durable goods, and consumer nondurable goods other than food and energy. From the services perspective, the Personal Consumption Index tracks changes in prices received by services producers for transportation of private passengers, transportation and warehousing of personal consumption goods, wholesale and retail trade in personal consumption goods, and services other than trade, transportation, and warehousing sold to personal consumption. The All Items CPI for All Urban Consumers (CPI-U), U.S. city average, measures the average change in prices urban consumers pay for goods and services.