● The Consumer Price Index (CPI), the Producer Price Index (PPI), and the Purchasing Managers' Index (PMI) are three essential index numbers that measure the macroeconomy.
● Both CPI and PPI measure price changes from the perspective of consumers and producers.
● PMI signals economic expansion and contraction. A reading above 50 indicates expansion and anything below shows contraction.
Understanding CPI, PPI, and PMI
The Consumer Price Index (CPI), a common measure of inflation and deflation, reflects price changes over time for a basket of goods and services purchased by typical households. The contents of the measured basket and the weights of categories can vary by region and country. The rate of CPI's short-term rise or fall can, to some extent, reflect the current economic environment. The more CPI rises, the more likely there will be inflation.
The Producer Price Index (PPI) measures the change in prices paid to producers for their output, including raw materials and labor services. The weights of categories of PPI vary in different countries and regions but basically cover the price changes in three stages: raw materials, intermediate goods, and finished goods.
The PPI and CPI are interrelated. Generally speaking, when PPI continues to rise, the upstream producers will more or less pass on rising costs to consumers, leading to elevated CPI.
The Purchasing Managers' Index (PMI) measures the prevailing direction of economic trends based on a survey of purchasing managers across various industries, including manufacturing PMI, services PMI, and architecture PMI. PMI tracks new orders, production, supplier deliveries, inventories, the backlog of orders, and employment. A PMI reading above 50 indicates expansion, while below 50 means contraction. The further away from 50, the greater the level of change.
How does the index affect the economy?
CPI, PPI, and PMI are important economic indicators that reflect the macroeconomic situation and serve as important references for national policymaking.
Take the US as an example. In June, the consumer price index surged by 1.3% in a month and a total of 9.1% over a year ago, the largest rise since Nov.1981. (Inflation rose 9.1% in June, even more than expected, as consumer pressures intensify, July 13, 2022)
This widely followed gauge reflected heating-up inflation, which may affect the central bank's decision to increase interest rates.
The rise of PPI as inflation remains benign can, to some extent, signal a dynamic economy. As we hopefully enter the post-COVID-19 economic recovery, growth in consumer demands may drive up production.
However, suppose PPI remains high while pressures from raw material prices, supply-demand balancing, and currency are rising. In that case, PPI growth tends to harm economic growth. If the gap between PPI and CPI continues to widen, the "pass-through" of a higher PPI to CPI is inevitable.
As a result, the profit margins of downstream businesses would be curtailed. Rising prices of consumer goods would also affect the everyday life of residents.
Many policymakers and market participants also closely watch PMI besides CPI and PPI. In June 2022, the Markit PMI fell to a 23-month low, while the services PMI dropped to 51.6, a 5-month low. Though the PMI reading still registered above 50, the economy grew at the slowest speed since the start of 2022. (MARKET SENSITIVE INFORMATION Embargoed until 0945 EDT (1345 UTC) 23 June 2022)
Some sectors saw stagnation, especially the manufacturing sector. Companies downgraded their next year's economic outlook amid high inflation, rising interest rates, subdued demand, and concerns about supply chain disruptions. Deteriorating forward-looking indicators signaled an economic contraction in Q3.
CPI, PPI, and PMI are important indicators compiled and released regularly in major global economies. Observing the changes in these indicators can help us effectively analyze the economic environment and the inflation level and make investment decisions.