Consumer price indexes ; Inflation (Finance)

William Gavin

English

Research Papers in Economics

February 2003
NationalEconomicTrends
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
PPI versus CPI
Inflation
I
n November and December of 2002, the producer
price index (PPI) declined unexpectedly, contributing
to concerns about deflation. In November, the PPI
for finished goods fell 0.4 percent. In December, although
analysts expected a 0.3 percent increase, it was unchanged.
In each of these months the core PPI (that is, the PPI
excluding food and energy) surprised analysts by falling
0.3 percent. 
Should we be concerned about declines in the PPI as
a possible harbinger of economy-wide deflation? The chart,
which presents a long-run perspective on the consumer
price index (CPI) and the PPI, includes four price measures
that are indexed to one in January 1967: (i) the PPI, (ii)
the all-item CPI, and (iii) the services and (iv) goods com-
ponents of the CPI. Since at least 1980, services prices
have tended to rise relative to goods prices. In just the past
five years, the services component of the CPI has increased
at an average rate of 3.2 percent per year, while the goods
component has increased at only a 1.1 percent rate.
Why have goods prices risen so much more slowly
than services prices?  The answer, as shown by the data,
is tremendous advances in
technology and productivity
in goods production. For
example, the PPI compo-
nent for electronic com-
puters and computer
equipment has fallen an
average of 12.3 percent
per year for the past five
years. Computer prices
are expected to decline far
into the future, and no one
thinks that this is a sign of
deflation. Rather, it is a
sign of technological
advances and cost saving
in computer manufacturing.
The average price changes for the eight major compo-
nents of the CPI have been widely dispersed in the past
five years. The food component of the CPI increased at
an average rate of 2.2 percent—which is close to the all-
item CPI inflation rate (2.3 percent).  Four components
had lower average price increases than the all-item CPI:
apparel (–1.6 percent), transportation (1.5 percent), recre-
ation (1.3 percent), and education and communications
(1.8 percent). The fall in electronic equipment prices has
helped moderate the relative rise in communications prices.
Three components had higher average price increases
than the all-item CPI: housing (2.8 percent), medical care
(4.1 percent), and the “other” category (5.0 percent). The
“other” category includes tobacco products and personal
care services.
We should not be too concerned about price declines
in the PPI (or any subset of the CPI basket) as long as
the broad price indexes such as the CPI are stable. If CPI
inflation remains at about 2 percent per year, then recent
trends suggest that the PPI will increase at a rate of about
1 percent. Similarly, CPI inflation would have to be below
1 percent before we would expect to see ongoing price
declines in the goods sector.
—William Gavin
Available on the web at research.stlouisfed.org
Price Indexes
Average Price Increases for Past Five Years
CPI-Services  3.2
CPI-All Items  2.3
CPI-Goods     1.1
PPI                  1.2
Index, 1967 = 1
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
1967 1972 1977 1982 1987 1992 1997 2002
CPI-Services
CPI-All Items
CPI-Goods
PPI

PPI versus CPI inflation

http://research.stlouisfed.org/publications/net/20030201/cover.pdf

PPI versus CPI inflation

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics