Consumer Price index (CPI)
Consumer Price index is a measure of the total value of goods and services consumers
bought. This is the perception how ugly the face of inflation is in the eyes
of individuals like me and you or your friend next door. Consumers can feel
this index by buying a gallon of orange juice, sodas, and a bag of mashed potato
mix at a supermarket and returning to get some more the following week only
to find out that they have to pay an extra $1.30 for the same items. CPI
measures the difference between the total value of the basket of goods you normally
buy today with the total value of the same basket of goods from a base year
Producer Price Index (PPI)
This index measures the degree of inflation in the eyes of producers. It is
also an early inflationary warning since an increase in prices of raw materials
being fed to producers to create their final product greatly affects their wholesale
pricing to retailers. Retailers like Walmart, Target or Albertson's profit by
charging consumers extra per unit of a good. At this stage consumers would feel
the change in price as it costs producers extra to manufacture the product.
So looking at an inflation index at its early stages is a valuable tool to gauge
future inflationary levels.
This Index is the value of a basket of goods, services and final products produced
by the entire nation. The index is a broader measure of the overall change in
price than the CPI and the PPI.