One of the most prevalent issues that economies all around the world consistently face is inflation. In order to track and manage inflation, there are several key indicators that signal whether inflation is on the rise or not and whether consumer spending is being affected by inflation.
These indicators are the Personal Consumption Expenditure (PCE), Consumer Price Index (CPI), and Producer Price Index (PPI).
PCE
The PCE, or personal consumption expenditure, is an indicator of consumer spending.
The PCE looks at the prices of consumer goods and services, tracking the cost of living in the economy and giving an indicator to the government about the state of consumers, rather than companies.
The PCE is deduced by a basket of goods and services, with each item weighted differently depending on how much consumers typically spend on that item. A commodity like gasoline may have a larger impact on the index than apples, for example, given that it represents a bigger portion of consumer spending.
It’s also worth noting that the PCE is the Fed’s preferred measure of inflation since it more accurately reflects consumers’ spending habits than other indicators.
In addition, there is a variant of the PCE called core PCE, which strips out prices of volatile commodities like food and energy.
CPI
The CPI, or the consumer price index, is one of the most popular measures of inflation.
It is quite similar to the PCE, with both being reliable and widely used measures of inflation. The CPI is calculated based on a fixed basket of goods and services. The change from month to month in the CPI represents the widely reported inflation rate.
Similarly to the PCE, there is the core CPI, which also strips out food and energy prices from the calculation due to their volatility.
PPI
The PPI, or the producer price index, is another measure of inflation used by the government.
This indicator measures inflation from the wholesale level, putting together thousands of indexes that represent producer’s prices in different industries. The PPI is considered an important indicator, as it looks at changes in prices from a producer’s standpoint, whereas the PCE and CPI look at inflation from the consumer’s perspective.
What’s the Difference
The above indicators are similar in that they all provide a measure of inflation.
All three look at price changes of goods over time. However, there is one fundamental difference between each one of the indicators.
The PCE looks at data regarding price changes in a basket of goods and services retrieved from business reports.
The CPI looks at price changes in a basket of goods and services based on survey data from thousands of consumers.
The PPI looks at price changes from the supply side rather than the demand side. It doesn’t look at retail prices consumers pay, but wholesale prices that suppliers pay to domestic producers.
Bottomline
Each indicator aims to measure price changes over a period of time. All three must be used concurrently in order to track the health of the economy. Generally, all three indicators move within close proximity to one another, reflecting the minor differences between them.
