On Monday, Justin Ho on Marketplace had a piece on producer prices. He covered several interesting questions, including the implications of a PPI rising faster than the CPI:
That added pressure [from higher input prices] puts businesses in a tough spot, according to Matthew Miskin, co-chief investment strategist with Manulife John Hancock Investments.
“They either get lower profit margins, or they have to pass this on to consumers,” Miskin said. “And the question becomes, ‘Can consumers take on that higher price point?’”
That’s why inflation at the producer level can eventually hit consumers — especially for groceries, toothpaste, and other consumer staples.
“These are very low-margin businesses, so they don’t have that much wiggle room to not pass the price on,” Miskin said.
The PPI is less well understood than the CPI, so it bears repeating that there are many PPIs — for different commodities and for different stages of production. The most commonly reported is the PPI for final demand (PPIFIS, PPIFES for total, core). BLS provides a primer on some misconceptions regarding the PPI. Even looking at final demand PPI, the coverage and weights differ. Shelter is one big component of CPI not in PPI.
Here’s a plot of the time series for core CPI ex-shelter and core PPI, which should in some sense be similar in coverage.
Figure 1: Core CPI ex-shelter (blue), for core PPI (red), in logs 2025M01=0. Source: BLS via FRED.
PPI has been trending upwards faster than CPI for a long time (i.e., PPI inflation exceeds CPI inflation). This would seem to have implications for firms’ price-cost margins over the long term, except for the fact that coverage still differs at this level — in particular import prices are not included in the PPI (which measures prices received by domestic firms). This point is hghlighted in a recent Royal Bank of Canada memo:
If PPI is rising faster than CPI, this suggests that producers’ prices are rising faster than consumer prices. For example, a commercial baker may charge more for bread if wheat prices rise, but a neighborhood café that purchases bread from the bakery may not adjust menus reflect higher prices.
If we see PPI exceed CPI for a prolonged period of time, then end-stage sellers are likely to raise prices; otherwise it could spell trouble for corporate profit margins.
Clearly, because of compositional issues, that logic doesn’t work for levels, but might work for changes in PPI and CPI inflation rates.
Figure 2: Three month annualized inflation rates for core CPI ex-shelter (blue), for core PPI (red). Source: BLS via FRED.
Core PPI is rising faster than core CPI ex-shelter on Q/Q — so this suggest compression of price-cost margins — excepting the role of imports… and labor costs.
There is a direction of corporate profits measure that comes from the PPI — final demand trade services (compares retailer selling and acquisition prices, for domestic producer prices):
Figure 3: PPI – final demand trading services (blue, left scale), ratio of core CPI ex-shelter to core PPI (red, right scale). NBER defined to peak-to-trough recession dates shaded gray. Source: BLS, NBER, and author’s calculations.
There is a rough (inverse) correlation, but it’s not tight, particularly over the past year.
To the extent that some PPI is predictive of the future trend of some CPI, then the downward divergence of core CPI/core PPI in figure 3 points to upward pressure on CPI.
We are still engaged in an experiment to see whether tariffs represent a one-time lift to prices, or a presistent lift to inflation due to reduced efficiency. Petroleum, fertilizer, LNG, aluminun and other products are again bottled up in the Persian Gulf. Fed’s gonna raise rates.
Facts Only
* Justin Ho on Marketplace covered producer prices.
* Matthew Miskin stated that added pressure from higher input prices forces businesses to either lower profit margins or pass costs to consumers.
* Low-margin businesses have limited room to pass on price increases for consumer staples like groceries and toothpaste.
* Producer Price Index (PPI) is less understood than Consumer Price Index (CPI).
* The PPI measures prices received by domestic firms, and import prices are not included in PPI measurements.
* Core CPI ex-shelter and core PPI time series were plotted.
* Core PPI was rising faster than core CPI ex-shelter on a Q/Q basis.
* A measure of corporate profits comes from the PPI related to final demand trading services.
* There is a rough, inverse correlation between certain PPI measures and the ratio of core CPI ex-shelter to core PPI over the past year.
* Tariffs are under investigation regarding their effect on inflation due to potential efficiency changes.
Executive Summary
The discussion centers on the relationship between producer price inflation (PPI) and consumer price inflation (CPI). An increase in PPI due to higher input costs puts pressure on businesses, forcing them to either reduce profit margins or pass costs onto consumers. This dynamic is particularly acute for low-margin sectors like groceries and consumer staples, which have limited ability to absorb cost increases.
The article notes that PPI is less understood than CPI, with multiple measures existing for different commodities and production stages. While the relationship between PPI and CPI suggests that producer prices are rising faster than consumer prices in some instances, this implication is complicated by compositional differences; for instance, import prices are not always included in PPI measurements.
Data presented shows a tendency for core PPI to rise faster than core CPI ex-shelter on a quarter-over-quarter basis, suggesting potential compression of price-cost margins, though this relationship is complicated by factors like import costs and labor expenses. The data also suggests a weak correlation between producer prices and the ratio of consumer inflation measures over recent periods, pointing toward upward pressure on overall consumer inflation.
Full Take
The central tension lies in reconciling the differential effects of producer cost pressures across the supply chain versus the final price experienced by consumers. The divergence observed where PPI inflates faster than CPI suggests an inherent asymmetry in how cost shocks are transmitted, which is heavily mediated by sector-specific margins and trade flows. The point that end-stage sellers will raise prices if PPI outpaces CPI seems contingent on structural factors—specifically, whether the cost increase impacts operational efficiency versus pure input cost.
The mathematical divergence shown in the plots suggests a mechanism where producer pressure can precede consumer inflation, implying a potential for lagging or leading indicators within these metrics. The caveat regarding compositional differences, particularly concerning imports and labor costs, is crucial; ignoring these variables risks misinterpreting the relationship between PPI and CPI inflation rates. Furthermore, the uncertainty surrounding the impact of external factors like tariffs introduces noise into any attempt to establish predictive causal links.
The system appears to be governed by localized cost structures interacting with broader macroeconomic forces. The pattern suggests that while aggregate cost increases are observable in producer data, the resulting inflationary effect on consumers is filtered through structural constraints and external policy choices. Further inquiry should focus on isolating the impact of specific components (like imported vs. domestic costs) and testing the long-term persistence of this divergence under varying trade scenarios to understand which agents—producers or end-stage sellers—bear the ultimate burden of these shifts.
Sentinel — Human
The text reads like an analytical summary of an economic discussion, successfully synthesizing expert commentary and data visualizations to build an argument about producer and consumer price pressures.