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Journalistic Misunderstandings About the PPI




By Alan Reynolds, Cato Institute


According to CNN, “The Producer Price Index, which measures wholesale prices before goods and services reach consumers, rose 10.8% in May compared to where it stood a year ago.”

The PPI is not in any sense a measure of “wholesale” prices and has not been called that since 1978 (it was much narrower and simpler in the old days).

An AP headline declares, “US Producer Prices Soar 10.8% in May as Energy Costs Spike.” No, the PPI is not a measure of business costs for energy or anything else. The price businesses receive for their sales may at times be a cost for other U.S. businesses ­–if that is who they are selling to– but it is gross income (revenue) for businesses making the sale.

The PPI typically rises and falls with crude oil prices simply because big U.S. oil companies receive (not pay) higher prices when the global oil price goes up. The PPI is, in fact, overly sensitive to global oil, grain, and metals prices, and therefore to the effects of Russian war and sanctions on such prices. And no “core” measure can fix that.

The PPI is a measure of what business get paid, which importantly includes what they are paid for U.S. exports by foreign buyers. The high prices U.S. producers of oil and LNG collect from Europeans and other foreigners has lifted this year’s PPI numbers considerably.

A CNBC report says, “The [PPI] data is significant in that prices at the wholesale level feed through to consumer prices.” None of that is right. The prices are not wholesale, they are not costs, and they do not simply feed through to consumer prices.

The PPI uses profit margins to estimate prices received in wholesale and retail trade, which is so peculiar that the PPI for trade services is excluded from the inexplicable core PPI. Retail profit margins vanished in the 2020 pandemic and recovered when economies reopened, but that was recovery not inflation.

The PPI for carbon steel scrap fell 11.7% in May while prices for steel mill products rose 10.7%. Some portion of that cheaper or more expensive steel may be used to make consumer goods, rather than business parts and equipment, but those consumer goods might be exported.

Because prices received by business are from foreigners, governments, and other businesses (foreign and domestic), rather than just domestic consumers, there is no reason to expect prices that producers receive to cause or predict future prices paid by U.S. consumers. There is no evidence that today’s PPI can be used to predict tomorrow’s CPI, nor any reason to expect that would work.

The prices producers received for meats fell 6% in May, while prices producers received for cars and trucks rose only 0.3%. Try using that information to predict retail consumer prices at your peril.


Economist Alan Reynolds is a senior fellow at the Cato Institute.