How to Track Inflation Using the CPI, PCE, and PPI Indexes

If you’re someone who keeps an eye on the economy, you’ve probably heard the term “inflation” thrown around quite a bit.

Inflation is the rise in the price of goods and services, and it’s something that policymakers, businesses, and investors alike pay close attention to. But how do we measure inflation and understand its impact on the economy? That’s where inflation indexes come in.

Inflation indexes compile price data from various sources across the economy into one number, giving us a snapshot view of how much things cost and how those costs are changing over time.

There are three main inflation indexes that we’ll focus on: the Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index (PCE), and the Producer Price Index (PPI). Each index is compiled differently and has a different purpose. For example, the CPI is a measure of Americans’ purchasing power and is used by policymakers to understand the cost of items over time. Meanwhile, the PCE includes additional data like spending by the government and employers, representing closer to 100% of the U.S. economy. The PPI, on the other hand, tracks the costs to producers of goods and services and is useful for informing pricing strategies and predicting price changes for consumers.

Key Takeaways

• Inflation is the rise in the price of goods and services, and it’s something that policymakers, businesses, and investors alike pay close attention to.
• Inflation indexes compile price data from various sources across the economy into one number, giving us a snapshot view of how much things cost and how those costs are changing over time. The three main inflation indexes are the CPI, PCE, and PPI.

Understanding Inflation

Inflation, which refers to the rise in the price of goods and services, is closely monitored by policymakers, businesses, and investors. It is an important economic indicator as a little bit of inflation is usually a sign of economic growth, while too much inflation can hurt the economy.

To understand how inflation affects the whole economy, inflation indexes are used. These indexes gather price data from various sources across the economy and compile them into one number to give a snapshot view of how much things cost and how those costs are changing over different time periods.

There are three main inflation indexes that are commonly used: the Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index (PCE), and the Producer Price Index (PPI). Each one is compiled differently and has a different purpose.

Consumer Price Index (CPI)

The CPI, released by the U.S. Bureau of Labor Statistics (BLS) every month, is a measure of Americans’ purchasing power and is used by policymakers to understand the cost of items over time. To calculate the CPI, the BLS creates a basket of goods and services representing things the average American buys. The prices of tens of thousands of products and services, like housing and food, are monitored and weighted based on their estimated usage.

When the BLS publishes the basket pricing information each month, it can be compared to previous months or years to get an idea of how prices are changing or the percentage they’re increasing. For example, the CPI in October of 2023 was unchanged from September 2023 and up 3.2% year over year, which beat Wall Street projections and caused a stock market rally because it signaled an easing of inflation pressure.

CPI also plays a couple of other roles, like helping determine increases to government benefits like Social Security and food stamps. It’s also used to adjust Treasury Inflation-Protected Securities (TIPS), a government bond where the principal changes with inflation. Some economists like to strip out data about food and energy, the more volatile goods and services, for a more stable measurement known as core inflation.

Personal Consumption Expenditures Price Index (PCE)

The PCE, released monthly by the Bureau of Economic Analysis, is similar to the CPI in that it measures the price that consumers pay for goods and services. However, it weighs the categories that comprise it differently. While the CPI checks on 80,000 products, the PCE includes additional data like spending by the government and employers, representing closer to 100% of the U.S. economy.

As a result, the PCE weights the categories of its “basket” differently than the CPI. The extra data going into the PCE is why it’s considered more accurate than the CPI. It’s also why the Fed uses the PCE as its primary inflation metric when determining monetary policy. The Fed has a target inflation rate of 2%, which is considered a stable level in terms of economic growth and price stability.

While PCE data from 2023 still showed price in an upwards trajectory, the monthly percentage change was more in line with historical averages, especially when compared with the drastic swings during the pandemic in 2020.

Producer Price Index (PPI)

The PPI, released monthly by the BLS, reflects a survey of 25,000 establishments that send approximately 100,000 price quotations every month. It tracks the costs to producers of goods and services, which is significant for inflation. PPI compares that data for the current year against a baseline year in order to give a measurement of how it changes.

The information is useful in a lot of ways. Producers can compare prices of a given product or industry to inform their pricing strategy. It can also be used to foreshadow price changes for consumers. The assumption being if producers are paying more for wholesale goods, they’ll likely try to pass those increased costs to consumers. The government uses the PPI to inform its monetary and fiscal policies aimed at limiting inflation.

From October 2022 through October 2023, the PPI saw a wholesale price increase of 1.3% across the board. It was a drastic improvement from March 2022, when headline PPI saw a wholesale price increase of 11.7%.

Together, the CPI, PCE, and PPI can paint a picture of inflation in the United States. Inflation can affect the performance of individual investments, and investors can use it to investigate broader trends. It’s also a key indicator the Fed uses when setting interest rates, which can have major consequences throughout the markets. They’re another useful tool in your investor toolbelt.

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Inflation Indexes Overview

As an investor, policymaker, or business owner, keeping an eye on inflation is crucial. Inflation refers to the rise in the prices of goods and services, and it can either be a sign of economic growth or a hindrance to the economy. To understand how inflation affects the economy, we use inflation indexes.

Inflation indexes gather price data from various sources in the economy and compile them into one number. This number provides a snapshot view of how much things cost and how those costs are changing over different time periods. It helps us to see how much and how quickly prices are rising or falling, which can tell us a lot about economic growth and financial markets.

There are three main inflation indexes: the Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index (PCE), and the Producer Price Index (PPI). Each index is compiled differently and serves a different purpose.

The CPI is a measure of Americans’ purchasing power and is released by the U.S. Bureau of Labor Statistics (BLS) every month. The BLS creates a basket of goods and services representing things the average American buys, and it keeps an eye on the prices of tens of thousands of products and services. This basket pricing information is compared to previous months or years to get an idea of how prices are changing or the percentage they’re increasing. The CPI is also used to determine increases to government benefits like Social Security and food stamps. It’s also used to adjust Treasury Inflation-Protected Securities (TIPS), a government bond where the principal changes with inflation.

The PCE is similar to the CPI in that it measures the price that consumers pay for goods and services. However, it includes additional data like spending by the government and employers, representing closer to 100% of the U.S. economy. As a result, the PCE weights the categories of its “basket” differently than the CPI. The Fed uses the PCE as its primary inflation metric when determining monetary policy.

The PPI tracks the costs to producers of goods and services and reflects a survey of 25,000 establishments that send approximately 100,000 price quotations every month. PPI compares that data for the current year against a baseline year in order to give a measurement of how it changes. The government uses the PPI to inform its monetary and fiscal policies aimed at limiting inflation.

Together, the CPI, PCE, and PPI paint a picture of inflation in the United States. Investors can use inflation indexes to investigate broader trends and to understand how inflation affects the performance of individual investments. Policymakers use inflation indexes to set interest rates, which can have major consequences throughout the markets.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is one of the three main inflation indexes used to measure the price of goods and services in the United States. The CPI is released by the U.S. Bureau of Labor Statistics (BLS) every month and is used by policymakers to understand the cost of items over time.

To calculate the CPI, the BLS creates a basket of goods and services representing things the average American buys. The prices of tens of thousands of products and services, like housing and food, are weighted and incorporated into the basket based on their estimated usage. When the BLS publishes that basket pricing info each month, it can be compared to previous months or years to get an idea of how prices are changing or the percentage they’re increasing.

The CPI plays a crucial role in helping determine increases to government benefits like Social Security and food stamps. It’s also used to adjust Treasury Inflation-Protected Securities (TIPS), a government bond where the principal changes with inflation.

Some economists like to strip out data about food and energy, the more volatile goods and services, for a more stable measurement known as core inflation. Prices for both categories can swing violently in either direction, sometimes muddying long-term trends.

Overall, the CPI is an essential tool for investors, policymakers, and businesses to understand the impact of inflation on the economy.

Personal Consumption Expenditures Price Index (PCE)

The Personal Consumption Expenditures Price Index (PCE) is a monthly inflation index released by the Bureau of Economic Analysis. It measures the price that consumers pay for goods and services, including spending by the government and employers. Unlike the Consumer Price Index (CPI), which checks on 80,000 products, the PCE includes additional data and represents closer to 100% of the U.S. economy. Thus, the PCE weights the categories of its “basket” differently than the CPI, making it more accurate.

The PCE is the primary inflation metric used by the Federal Reserve when determining monetary policy. The Fed has a target inflation rate of 2%, which is considered a stable level in terms of economic growth and price stability. While PCE data from 2023 still showed price in an upwards trajectory, the monthly percentage change was more in line with historical averages, especially when compared with the drastic swings during the pandemic in 2020.

The PCE is an important tool for policymakers, businesses, and investors to keep a close eye on inflation. It helps them understand how much things cost and how those costs are changing over different time periods. By seeing how much and how quickly prices are rising or falling, they can make informed decisions about investment strategies and financial markets.

Overall, the PCE, along with other inflation indexes such as the CPI and PPI, provides a snapshot view of inflation in the United States. It is a key indicator used by the Fed when setting interest rates, which can have major consequences throughout the markets. As an investor, understanding the PCE and other inflation indexes can be a useful tool in your investment strategy.

Producer Price Index (PPI)

While the CPI and PCE focus on measuring the prices of goods and services that consumers pay for, the Producer Price Index (PPI) is concerned with tracking the costs of goods and services to producers. The PPI is released monthly by the U.S. Bureau of Labor Statistics (BLS) and is based on a survey of 25,000 establishments that provide approximately 100,000 price quotations every month.

The PPI compares the current year’s data against a baseline year to provide a measurement of how prices have changed. This information is useful in several ways. Producers can use it to compare prices of a given product or industry to inform their pricing strategy. Additionally, the PPI can be used to predict price changes for consumers. If producers are paying more for wholesale goods, they may try to pass those increased costs onto consumers.

The government also uses the PPI to inform its monetary and fiscal policies aimed at limiting inflation. From October 2022 through October 2023, the PPI saw a wholesale price increase of 1.3% across the board. This was a significant improvement from March 2022, when the headline PPI saw a wholesale price increase of 11.7%.

Understanding the PPI, along with the CPI and PCE, can provide a snapshot view of how much things cost and how those costs are changing over different time periods. Policymakers, businesses, and investors all keep a close eye on inflation, and these indexes can help them make informed decisions about economic growth and investment strategy.

Inflation and Investment Strategy

Inflation is a crucial economic indicator that can have a significant impact on investment strategies. It refers to the general increase in the prices of goods and services over time. A little bit of inflation is usually a sign of economic growth, while too much inflation can harm the economy. Policymakers, businesses, and investors keep a close eye on inflation to understand how it affects the overall economy.

To measure inflation, there are three main indexes that are commonly used: the Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index (PCE), and the Producer Price Index (PPI). Each index is compiled differently and has a different purpose.

The CPI is released by the U.S. Bureau of Labor Statistics every month and is a measure of Americans’ purchasing power. The CPI creates a basket of goods and services that represent things the average American buys. The prices of tens of thousands of products and services, such as housing and food, are weighted and incorporated into the basket based on their estimated usage. The basket pricing info is released monthly, and it can be compared to previous months or years to get an idea of how prices are changing or the percentage they’re increasing.

The PCE is similar to the CPI in that it measures the price that consumers pay for goods and services. However, the PCE includes additional data like spending by the government and employers, representing closer to 100% of the U.S. economy. As a result, the PCE weights the categories of its basket differently than the CPI. The Fed uses the PCE as its primary inflation metric when determining monetary policy because it’s considered more accurate than the CPI.

The PPI tracks the costs to producers of goods and services and is released monthly by the BLS. It reflects a survey of 25,000 establishments that send approximately 100,000 price quotations every month. The PPI compares that data for the current year against a baseline year to give a measurement of how it changes. Producers can use this information to inform their pricing strategy, and it can be used to foreshadow price changes for consumers. The government uses the PPI to inform its monetary and fiscal policies aimed at limiting inflation.

Investors can use inflation indexes to investigate broader trends and understand how inflation affects the performance of individual investments. Inflation is also a key indicator the Fed uses when setting interest rates, which can have major consequences throughout the markets. Understanding the different inflation indexes and how they are compiled can be a useful tool in an investor’s toolkit.

Impacts on Government Policies

Inflation indexes, such as the CPI, PCE, and PPI, play a crucial role in informing government policies aimed at limiting inflation. The government uses the PPI to understand the wholesale price changes across various industries. Policymakers use the CPI to determine increases in government benefits like Social Security and food stamps. Additionally, the CPI and PCE are used to adjust Treasury Inflation-Protected Securities (TIPS), a government bond where the principal changes with inflation.

The Federal Reserve uses the PCE as its primary inflation metric when determining monetary policy. The Fed has a target inflation rate of 2%, which is considered a stable level in terms of economic growth and price stability. The PCE is considered more accurate than the CPI as it includes additional data like spending by the government and employers, representing closer to 100% of the U.S. economy.

Inflation can affect the performance of individual investments, and investors can use inflation indexes to investigate broader trends. It is also a key indicator that the Fed uses when setting interest rates, which can have major consequences throughout the markets. Overall, inflation indexes are a useful tool in government policies and investors’ toolbelt to understand the impact of inflation on the economy.

Inflation and the Federal Reserve

Inflation, which is the rise in the price of goods and services, is closely monitored by policymakers, businesses, and investors. It can indicate economic growth, but too much inflation can harm the economy. To understand how inflation affects the whole economy, inflation indexes are used. These indexes gather price data from different sources across the economy and compile them into one number to give a snapshot view of how much things cost and how those costs are changing over different time periods.

The three main inflation indexes are the Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index (PCE), and the Producer Price Index (PPI). Each index is compiled differently and serves a different purpose.

The CPI, released by the U.S. Bureau of Labor Statistics (BLS) every month, is a measure of Americans’ purchasing power. To calculate the CPI, the BLS creates a basket of goods and services representing things the average American buys. The prices of tens of thousands of products and services, like housing and food, are weighted and incorporated into the basket based on their estimated usage. The CPI is used by policymakers to understand the cost of items over time and helps determine increases to government benefits like Social Security and food stamps. It’s also used to adjust Treasury Inflation-Protected Securities (TIPS), a government bond where the principal changes with inflation.

The PCE, released monthly by the Bureau of Economic Analysis, is similar to the CPI in that it measures the price that consumers pay for goods and services. However, it includes additional data like spending by the government and employers, representing closer to 100% of the U.S. economy. As a result, the PCE weights the categories of its “basket” differently than the CPI. The Fed uses the PCE as its primary inflation metric when determining monetary policy. The Fed has a target inflation rate of 2%, which is considered a stable level in terms of economic growth and price stability.

The PPI, released monthly by the BLS, tracks the costs to producers of goods and services. It reflects a survey of 25,000 establishments that send approximately 100,000 price quotations every month. PPI compares that data for the current year against a baseline year to give a measurement of how it changes. The information is useful for producers to inform their pricing strategy and for consumers to anticipate price changes. The government uses the PPI to inform its monetary and fiscal policies aimed at limiting inflation.

The CPI, PCE, and PPI together can paint a picture of inflation in the United States. Inflation can affect the performance of individual investments, and investors can use it to investigate broader trends. It’s also a key indicator the Fed uses when setting interest rates, which can have major consequences throughout the markets. Understanding inflation and the role of the Federal Reserve in monitoring and controlling it is an important aspect of investing.

This weeks goals:

Thanks for reading this week’s Newsletter. For the next month ensure you take a look at the changes in the CPI, PCE, and PPI indexes expanded upon in this article. Watch how they change, and how they affect the US economy.

That’s it for this week. See you next week!