PPI, CPI Inflations Move Inversely

The average Producer Price Index in the 12 months ending Sept. 22, which marks the end of the sixth Iranian month (Shahrivar), increased by 8.2% compared with last year’s corresponding period, the latest report by the Central Bank of Iran announced.

The CBI’s website put the preceding month’s PPI inflation at 7.6%.

A year-on-year increase of 10.7% was registered in the index compared with the similar month of last year. The PPI (using Iranian year to March 2012) stood at 247.3 in Shahrivar, indicating a 1.4% rise compared with the previous month.

The PPI inflation has been on the rise since October last year. The index in the 12-month period ending Oct. 22 increased by 3.2% compared with last year’s corresponding figure. Ever since, it took on an upward trajectory.

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 of 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 CPI in future months. Almost a perfect correlation exists between CPI and PPI.

The central bank’s latest data on CPI show the average goods and services Consumer Price Index for urban areas in the 12 months ending Sept. 22 increased by 9.9% compared with last year’s corresponding period.

Inflation in Iran reduced to a single digit for the first time after about a quarter century in June 2016. It then followed a downtrend until it bottomed out at 8.6% in the middle of fall. It then rose above 10% in the 12 months ending June 21 this year before starting to go down since August.

Deputy Economy Minister Hossein Mirshojaeian said late May that the overall inflation rate for the current Iranian year to March 20, 2018, is expected to remain below 10%.

“The government is planning to boost manufacturing and create jobs this year, but it does by no means want to give rise to runaway inflation. Our estimate is that a tight rein will be kept on inflation,” he said.

Higher demand during the Iranian New Year holidays in late March, the presidential vote on May 19, the sale/rent peak in the housing sector in summer and rising food demand during the Muslim month of Ramadan that ended on June 25 have been highly influential in pushing up the inflation rate this year.