to manufacturers, and about 15 percent of the PPI is energy related. There
are no services in the producer price index. At the same time the PPI is an-
nounced, indexes for the prices of intermediate and crude goods are re-
leased, both of which track inflation at earlier stages of production.
The second monthly inflation announcement, which follows the
PPI by a day or so, is the all-important consumer price index(CPI). The
CPI does cover the prices of services as well as goods. Services, which in-
clude rent, housing, transportation, and medical services, now comprise
over half the weight of the CPI.
The consumer price index is considered the benchmark measure of
inflation. When price level comparisons are made, both on a historical
and an international basis, the consumer price index is almost always
the chosen index. The CPI is also the price index to which so many pri-
vate and public contracts, as well as Social Security and government tax
brackets, are linked.
The financial market probably gives a bit more weight to the con-
sumer price index than to the producer price index because of the CPI’s
widespread use in indexing and political importance. But many econo-
mists regard the producer price index as more sensitive to early price
trends as inflation often shows up at the wholesale level before it shows
up on the retail level.Core Inflation
Of importance to the market is not only the overall inflation rate but in-
flation that excludes the volatile food and energy sectors. Since weather
has a great influence on food prices, a rise or fall in the price of food over
a month does not have much meaning for the overall inflationary trend.
Similarly, the fluctuations of oil and natural gas prices are due to weather
conditions, temporary supply disruptions, and speculative trading that
do not necessarily persist into future months. To obtain an index of infla-
tion that measures the more persistent and long-term trends of inflation,
the government also computes the coreconsumer and producer price in-
dexes, which measure inflation excluding food and energy.
The core rate of inflation is more important to the central banks as
it identifies underlying inflation better than changes in the overall index
that include food and energy. Forecasters are usually able to predict the
core rate of inflation better than the overall rate since the latter is influ-
enced by the volatile food and energy sectors. An error of three-tenths of
a percentage point in the consensus forecast for the month-to-month rate
of inflation might not be that serious, but such an error would be con-CHAPTER 14 Stocks, Bonds, and the Flow of Economic Data 245