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Wholesale Inflation vs. Consumer Inflation

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.