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How Should We Measure Inflation?

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How is Inflation Measured?

Inflation is measured using several different price sources, with the U.S. Consumer Price Index (or CPI) and the Producer Price Index (or PPI) being two of the core metrics. The CPI measures the price changes in consumer goods and services. Prices on goods like cars, clothing and food are measured from the purchaser’s point of view. The PPI measures the price changes in goods and services by domestic producers from the seller’s viewpoint. Both indices are calculated monthly and data are produced by the U.S. Bureau of Labor Statistics.

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Why inflation rates play a part in your investment decisions Market Realist’s View

PPI includes the whole output of producers in the United States. It includes goods and services purchased by producers as inputs. But it also includes goods and services bought by consumers from retail sellers and directly from the producer. In contrast, CPI includes goods and services that are bought for consumption. However, CPI includes imports; PPI does not.

The graph above shows the year-over-year (or YoY) percentage change in the two indexes. As you can see, PPI tends to move in a different path from time to time, while the long-term trend is similar. The dip in inflation rates in 2015 was due to the sudden decline in oil (USO) prices.

Investors pay close attention to inflation figures because they tend to affect their investments. Bond (BND) prices take a hit when inflation is rising or high since they erode the value of future coupon payments, especially if they’re fixed. Meanwhile, commodities (DBC), which are often dubbed as inflation hedges, outperform.

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