Introducing the U.S. Government's New and Improved Inflation Measure

Inflation has been slightly higher as measured by the new Producer Price Index for personal consumption

Shopkeepers don’t just wake up one day and decide to raise prices. The prices you see in the store window and on the website are the very end of a long chain of markups that begins with basic stuff like coal, wheat, and the sweat of workers’ brows. If you want to know whether there’s inflation coming down the line, you need to look at the prices that are being paid at each stage of production and for each type of input.

Starting today, the U.S. Bureau of Labor Statistics is providing vastly more information about what’s in the inflation (or deflation) pipeline. Its Producer Price Index, which traces its roots back to 1902, making it one of the government’s oldest data series, is getting its biggest makeover since 1978.

You don’t have to be a data wonk to see the importance of the change: “Markets will pay more attention to the new PPI because we’re getting a much broader perspective than before,” Dana Peterson, an economist at Citigroup Global Markets in New York, told Bloomberg News. “It has the ability to give us an early indication on what we might expect for consumer inflation. The old PPI had lost its luster because it was missing a chunk of the economy.”

On the eve of the release, I spoke with Joseph Kowal, an economist who works on the PPI at the Bureau of Labor Statistics. He sounded excited about the change. “We’ve reached a threshold over the last few years,” he said, where experimental price indexes are reliable enough to be incorporated into the main, official measure.

If you want to know much, much more about the new Producer Price Index, read this article from the January issue of the bureau’s Monthly Labor Review. A briefer treatment is here. In a nutshell, the Producer Price Index will more than double its reach, adding price indexes for services, construction, government purchases, and exports. That will give it coverage of more than 75 percent of what it calls “in-scope domestic production.” It still won’t include housing construction, which is domestic but outside of its scope, or exports, because they aren’t domestic.

The BLS will publish lots of figures but it will call attention to one: the price index for final demand, which measures price changes for goods, services, and construction sold for personal consumption, capital investment, government purchases, and exports. The figure that the BLS called attention to in the old PPI was the finished goods index. The new one differs from the old one in two respects, the government says: “First, it includes government purchases and exports. Second, it includes services and construction, which are not reflected in finished goods.”

It’s a bit dry, true, but an important new resource for economists trying to figure out whether or not higher inflation is in the offing.

Before it's here, it's on the Bloomberg Terminal.