What Are the Producer Price Index (PPI) and the PCE Price Index
The CPI is not the only inflation measure. Knowing the PPI, which looks at the production stage, and the PCE, which the U.S. Fed watches most, makes the news far easier to read.
PPI: Prices at the Stage Before Reaching the Consumer
The PPI (Producer Price Index) is a measure of the change in the prices producers receive when they sell goods. That is, it is the price at the factory and wholesale stage, before reaching the consumer. In Korea it is published by the Bank of Korea, and in the U.S. by the Bureau of Labor Statistics (BLS).
The PPI draws attention because of its character as a "leading indicator." When the prices of raw materials or intermediate goods rise, a firm's production costs increase, and that burden tends to eventually pass through to consumer prices (CPI) with a time lag.
So when the PPI starts to stir first, it is used as a reference for gauging in advance, "consumer prices may rise a few months from now." That said, cost increases are not always passed on to consumers 100%, so the PPI and CPI do not always move in the same direction.
PCE: The Inflation Measure the Fed Trusts Most
The PCE (Personal Consumption Expenditures Price Index) is an inflation measure published by the Bureau of Economic Analysis (BEA) under the U.S. Department of Commerce.
What is especially important is that the U.S. Federal Reserve (Fed) has treated this PCE as its most preferred inflation measure since 2000. The Fed's famous "2% inflation target" has also been defined in terms of this PCE since 2012.
In other words, when the Fed decides whether to raise or lower rates, it weighs the PCE more heavily than the CPI, so the market pays great attention to the monthly PCE release.
If you see the phrase "the Fed's 2% target" in the news, it is worth remembering that the 2% is measured against the PCE, not the CPI.
Why the PCE and CPI Differ
Even though they measure the same prices, the PCE and CPI produce slightly different numbers. There are two main reasons.
First, the scope of coverage differs. The CPI looks only at the "out-of-pocket" spending that urban households pay directly. The PCE, by contrast, includes more broadly the spending others pay on your behalf — for example, health insurance covered by an employer or medical costs from government Medicare and Medicaid.
Second, they reflect the substitution effect differently. The PCE more frequently reflects consumers switching from goods that have become expensive to relatively cheaper ones. So the PCE inflation rate tends to come in slightly lower than the CPI.
In fact, since 2000, the average annual CPI inflation rate has been about 0.39 percentage points higher than the PCE.
This 0.39 percentage points is the "long-run average difference" since 2000. In any given month, the gap between the two measures can be larger or smaller than this, and the direction can even be reversed.
常见问题
Q. If the PPI rises, does the CPI always rise too?
Not necessarily. Even when production costs rise, firms often cannot raise prices fully because of competition, or pass through only part of the increase. The PPI is only a "reference for glimpsing the direction of consumer prices in advance"; you cannot conclude it will feed straight into consumer prices.
Q. So which should we watch — CPI, PPI, or PCE?
It depends on your purpose. To feel your own cost of living, the CPI; to gauge the leading flow of prices, the PPI; to understand the U.S. Fed's rate decisions, the PCE is useful. Watching all three together gives a more three-dimensional picture of prices. Whichever the measure, it is best used as background for understanding the environment, not as a tool for predicting the future.
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