Economy, Domestic Economy

CPI Drop Follows PPI

CPI Drop Follows PPI
CPI Drop Follows PPI

The Producer Price Index in the 12-month period ending June 20, which marks the end of the Iranian month of Khordad (ended June 20), increased by 3.8% compared with last year’s corresponding period.

According to the latest report by the Central Bank of Iran, the index registered a year-on-year increase of 1.6% compared with the similar month of last year.

PPI (using 2011 as the base year) stood at 218.2 in Khordad, indicating a 0.3% growth compared with the previous month.

The PPI inflation in the previous Iranian month of Ordibehesht stood at 4.3%, CBI reported.

The importance of PPI lies in its predictive content for the future pattern of Consumer Price Index. Changes in PPI are usually reflected in CPI within a short period of time.

PPI gauges the price fluctuations of goods and services for the producer whereas CPI measures changes in the price level of a basket of consumer goods and services purchased by households. In other words, PPI is an index of prices measured at the wholesale, or producer level. It shows trends within the wholesale markets (as it was once called the Wholesale Price Index), production industries and manufacturing industries and commodities markets from the perspective of the seller.

According to Investopedia, PPI can serve multiple roles in improving investment-making decisions because it can serve as a leading indicator for CPI.

When producers are faced with input inflation, those rising costs are passed along to the retailers and eventually to the consumer.

Furthermore, PPI presents the inflation picture from a different perspective than CPI. Although changes in consumer prices are important for consumers, tracking PPI allows one to determine the cause of the changes in CPI.

If, for example, CPI increases at a much faster rate than PPI, such a situation could indicate that factors other than inflation may be causing retailers to increase their prices.

However, if CPI and PPI increase in tandem, retailers may be simply attempting to maintain their operating margins.

All in all, a decrease in PPI is one of the signs of a probable slowdown in the CPI in future months. Almost a perfect correlation exists between CPI and PPI.

The PPI in Iran fell to a single digit of 9.3% in the Iranian month of Shahrivar last year (Aug. 23-Sept. 22) after about half a decade. CPI mirrored PPI in hitting a single-digit rate nine months later, as it was recorded at 9.5% for the 12-month period ending June 20, which marks the end of Khordad—its lowest in about a quarter century.

The PPI broke above 10% once the first phase of Subsidy Reform Plan was implemented in late November 2010 and continued to rise to 38% in 2011—the highest in five years. PPI inflation grew smaller afterward, reaching 24% in late August 2012 but with the start of fluctuations in the foreign currency market in the same year, a staggering 46.1% PPI inflation was posted in late September 2013—an unprecedented peak since 1995.

Economic policies employed by the incumbent administration over the past two years, including curbing foreign currency fluctuations, have resulted in the reduction of production costs and consequently the fall of PPI.

Even the implementation of further phases of Subsidy Reform Plan and energy price hikes in 2014 and 2015 did not lead to a constant change in PPI.

Other factors linked to the declining trend of PPI by experts include recession and low demand in the market as well as the impact of global falling prices. In fact, the stability of the nominal rate of foreign currency has led to a drop in the value of imports in terms of local currency.

Given the significant role of imported goods in industrial manufacturing, the decline in imports value has caused the PPI to follow suit.