If you are planning to be a great investor. It is critical that you understand the importance of the Consumer Price Index (CPI) and Producer Price Index (PPI) index. This information is widely followed by economic indicators of the current economy and where it is heading in the coming years. By understanding how these data work, investors would know how to better invest their money in the sector of a business.
In this article, I will be sharing what CPI and PPI indicators are used for, why you should read them, and how you can read them to be a better investor.
What are the CPI and PPI data used for
Although both are published by the United States Bureau of Labor Statistics (BLS) and both track price changes for goods and services, they differ significantly in the composition of their target sets of goods and services, as well as the types of prices collected for those different goods and services. The CPI index provides information on goods and services purchased by the retailer while the PPI index shows the goods and services purchased by businesses.
Economists used the CPI and PPI data to make judgments about where the economy will be heading. For example, in 2022 when CPI data inflation is over 8.5%. Economists are able to use the data provided to claim that we will be in a recession. From that, they will be able to give their opinion on where each market sector will be heading.
Why do investors need to know these data?
The key to being a good investor is finding out the unknown to lower the risk in investment as much as possible. Learning and understanding in-depth a company’s future potential, that’s where the best investors are. CPI and PPI index shows where consumers and businesses are spending most of their money on. As a smart investor, you will need this information to make an informed judgment about your investments.
Which is the more important data to look at
Although the CPI index is the one that has the most attention, it isn’t as important as the PPI index. The reason why there is a lot of attention when it comes to the CPI index is that it is closely related to the current livelihood of the retailer. However, the PPI index is the more important data to look at because it provides a leading indicator of how the current economy will play out.
What should I look at when reading CPI and PPI index
Looking at CPI and PPI indexes is not actually hard to look at. Although there are many sophisticated wordings and numbers to look at. The important information can be summarized into a few sentences and data to look at. Here is the breakdown information for you to look at the next time you are looking at a CPI or PPI index data.
CPI inflation number
The key figure to look at that summarized the current economy. The CPI inflation number provides the current inflation the economy is facing. However, note that this inflation number is usually a lagging indicator by about a month. To find true inflation, it is important for an investor to look deep into the numbers for goods and services.
Goods and Services
The CPI data breaks down these different goods and services, which are:
- Food and Beverage
- Transportation (Used car, gas prices)
- Medical care
- Other goods and services
Investors typically look at transportation, housing, and recreation as their main economic indicators of where the market will be. If transportation cost increases, almost everything in the goods and services sector will have to increase its pricing. Likewise, the changes in the housing market affect many businesses and individuals if rent is increased. Apart from that, recreation is used as an indicator of whether retailers are willing to spend money. Therefore, during a booming economy, a good outlook will be a strong uptrend in recreation and stable transportation & housing market.
Although these are what investors typically look at, the other indicator is also an important factor to look at during uncertain times. For example, during the Covid-19 pandemic that happened back in 2020, many investors thought that the cost of medicine will skyrocket due to the lockdown. However, The medical care index rose 1.8 percent in 2020, less than the 4.6 percent increase reported in 2019. The hospital services index increased 3.0 percent in 2020, the same as in 2019.
How understanding CPI & PPI index will make me a better investor
By understanding how these 2 indexes will play out in the future, you will become a better investor. A good example will be understanding the rising prices of gasoline which lead to increasing demand for electric vehicles that have now seen exponential growth in the market.
In the short run, a stock market is a voting machine but in the long run, it is a weighing machine. To be a smart investor, sticking to a well-researched and informed decision in your investment will make your investment journey a lot better compared to the rest. Like we are currently facing high inflationary pressure that has caused the economy to turn into a technical recession. A smart investor will know that inflation will pass and so will a recession. So always believe that a recession is a good thing! Stick to your investment decision and see the CPI and PPI indexes trend to keep your conviction in the market strong.