Back-to-back readings of hotter inflation in US this week, we’re starting with the basics

Inflation is looking hot lately, with CPI coming in slightly above expectations on Wednesday (yesterday) and PPI coming in solidly above expectations this morning (Thursday). Unemployment claims are also creeping up, based on data released this morning, but that number was below forecasts.

As our newsletter is young, and we will be going beyond the headlines, in today’s letter we’ll establish exactly what these are all measuring first and foremost. We’ll do that for all our letters so that you have real knowledge – we’ll define and explain concepts and terms up front, so that in future letters you know exactly what we’re talking about.

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CPI

What is it: CPI, the Consumer Price Index, is the one everyone knows, and it’s usually the one most commonly referenced when you see a headline about inflation, broadly speaking. It measures the change in the price of a basket of goods and services commonly purchased by consumers.

Where do we get it: It’s published by the US Bureau of Labor Statistics (BLS), which falls under the US Department of Labor.

How often is it measured: It’s released monthly, calculated month over month and year over year. The headline changes are often expressed as year over year (y/y).

Why is it important: We’re going to seriously oversimplify a complex topic here, but we’ll focus on the obvious – consumers and governments both don’t like higher prices, all else equal. Consumers will buy less stuff if it gets more expensive, suppressing growth, and governments are in charge of managing the stability of the currency. We say all else equal, because economies are extremely complex organisms with indefinite inputs. For example, if prices are increasing, but wages are growing too, consumers can maintain their usual habits using higher wages to offset higher prices. But generally speaking, and this is true today, when we say inflation, we mean inflation that is higher than desirable.

Other variants: CPI is used interchangeably with inflation, but CPI is just one measure of inflation. You’ll also hear the measure of “core CPI”. Core CPI is just like CPI except it excludes food and energy prices. So you might also hear it discussed as CPI ex-food and energy. This is because oftentimes in economic and financial analysis, the goal is to observe and understand long term trends, but food and energy prices can be extremely cyclical, volatile, and responsive to factors that don’t truly represent any significant underlying trends. For example, if a natural disaster or weather event damages food supplies in a certain region, food prices may spike, but this spike may be temporary and not indicative of a real long term trend, so we strip it out.

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PPI

What is it: PPI is the Producer Price Index. Sitting across the commercial relationship from consumers is producers. Just like the CPI measures price changes incurred by consumers, the PPI measures price increases incurred by producers, the companies making stuff that consumers buy. This is important to track as producers sit upstream from consumers in an economic system. Usually, when producers experience higher prices, they will pass these higher prices on to consumers. For example, a tire manufacturer is reporting higher rubber prices (PPI) so they will raise prices on their tires, which make cars more expensive (CPI)

Where do we get it: Same as the CPI, it’s published by the US Bureau of Labor Statistics (BLS), which falls under the US Department of Labor.

How often is it measured: Same as the CPI, it’s released monthly, calculated month over month and year over year. The headline changes are often expressed as year over year (y/y).

Why is it important: CPI gets all the headlines naturally, because it reflects what consumers are paying out of pocket, but PPI can provide important insights into the health of the economy. Mainly, because producers often try to pass higher process to consumers, which means it is effectively feeding CPI anyway. But it can also allow an analyst to try to pinpoint root causes, for example how are prices in the logistics and transportation industry, vs. construction, vs. manufacturing, and so on. A commodities trader will remember 2021 and 2022 how the price of lumber became extremely volatile and saw massive spikes. Connecting the dots, one could trace the price of a commodity like this and expect to see it reflected in higher prices for producers that depend on it. Then, of course, you’d expect it to drive CPI higher in turn.

Other variants: Same as the CPI, PPI has a “Core PPI” variant which excludes food and energy.

Now that we’ve clarified exactly what these are and how they’re used, we’ll be tracking them extremely closely for the foreseeable future.

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