Government 
5
comments

Wholesale Inflation vs. Consumer Inflation

Email  Print Print  

You may have seen today’s article on how wholesale inflation increased 6.3% in 2008, the largest in 28 years, and remarked how your salary hadn’t increased by that much. Well, part of that reason is because wages aren’t so closely linked to inflation (they’re linked to how much your employer thinks you should be paid!) and part of that is because wholesale inflation is a little different from consumer inflation. In fact, the concept of inflation is so nebulous that there are about a million (okay, maybe only a dozen) different ways to measure and analyze it. You really need to be careful what you’re looking at before jumping to conclusions. The inflation that most people refer to at the consumer side is consumer inflation and that’s measured by the Consumer Price Index (CPI). Wholesale inflation is measured by the Producer Price Index (PPI). Wholesale inflation is most important to investors, than consumers, because it gives you an idea of how prices have increased for producers of products, i.e. companies.

Why do the two values differ? The PPI includes intermediate goods and fuel/energy prices, two pieces that aren’t included in the core CPI. (fuel is included in the total CPI) So, when the statement is made that wholesale inflation increased 6.3%, you can’t accurately compare that to the CPI because it includes one measure that is entirely ignored by the CPI and one that isn’t included in the core.

The CPI is a measure of averages prices for consumer goods and services purchased by the typical household. The CPI is used to index many things that you deal with from wages to retirement plans, it’s a measure of how much you can expect to spend compared to other years. In the US, the CPI is broken up into several measures, as if it weren’t confusing enough. There is a CPI-W for urban consumers and clerical workers plus a C-CPI-U (chained CPI) for all urban consumers. The interesting feature of the CPI calculation, regardless of the type, is that you have the total CPI and the core CPI. The core CPI does not include energy and food. As you probably recognize, that energy piece is what has been fluctuating the most lately (if rocketing skyward counts as fluctuating)

Why isn’t food and fuel counted in core CPI? It’s because of that volatility, it’s hard to get a good year to year comparison if you include food and fuel, which makes sense to me. The increases in fuel and food are in part a component of the other measures because they are a subcomponent of life in general. For example, transportation is a component of core CPI and it clearly will use fuel. Medical care is a component of CPI and clearly those dispensing medical care (and the massive health care industry) will require food and fuel to operate.

I’m by no means an economics expert but I think it’s important to note that wholesale inflation is not the same as consumer inflation, though similar, and that to make an accurate apples to apples comparison you need be sure you’re looking at the right figures.

{ 5 comments, please add your thoughts now! }

Related Posts


RSS Subscribe Like this article? Get all the latest articles sent to your email for free every day. Enter your email address and click "Subscribe." Your email will only be used for this daily subscription and you can unsubscribe anytime.

5 Responses to “Wholesale Inflation vs. Consumer Inflation”

  1. Miller says:

    Regardless of whether the 6.3% number is correct for the CPI (probably more relevant to us), the article says that raise the highest in 26 years. No matter how many caveats you put on that, it can’t be good for consumers. Couple that with all these recession worries and resulting low raises and ’08 might be a little tight. I hate to be pessimistic, but isn’t anyone else starting to get worried?

  2. Ryan S. says:

    That’s a nice bit on explaining the difference between the two. I’m not all that worried about inflation at this point; I’m more concerned about growth going close to nowhere. The Fed overshot and kept rates too high, too long. We’ll see how things go in the coming months…
    -
    Ryan
    http://uncommon-cents.net/

  3. Phil says:

    I’ve got to hand it to you, Jim — you’re doing an excellent job of helping to explain basic economic data.

    A word of warning: there are those out there who may not appreciate what you’re doing. After all, having an educated populace does not bode well for those who require a dumbed-down citizenry.

  4. rhbee says:

    I have to agree with Miller that this information explains and yet gives me more cause to be worried. I get the sense that those of us who are really thinking about personal finance are somewhat insulated from the real world. We are taking care, managing for ourselves, and planning well. But last night my wife and I were discussing this after listening to an audio on long term investing. The presenter maintained that the companies to invest in were the ones that could and would survive a financial meltdown of the banking industry. My wife thought that this sounded reasonable. But I questioned the idea because in my mind, just because a company/corporation can survive does not mean that I can survive a financial meltdown of our economy. It seems to me that that was what happened during the great Depression. Yes, some companies survived. But the people, they ended up on the streets, jobless, and destitute.

  5. Lazy Man says:

    I’d like to see them use some kind of moving average for food and energy. It seems like that could take some of the volatility out of the system.


Please Leave a Reply
Bargaineering Comment Policy


Previous Article: «
Next Article: »
Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2014 by www.Bargaineering.com. All rights reserved.