CPI and PPI inflation in the USA. Energy prices

The BLS publishes the CPI and PPI (commodity data) estimates at a monthly basis. One can estimate the inflation rate on a monthly basis as well using the monthly estimates separated by one year period. For example, the rate of inflation in December 2022 can be obtained as the difference between the CPIs published in December 2022 and December 2021 divided by the CPI in December 2021. This is a standard definition of inflation. Figure 1 presents the rate of CPI and PPI inflation in the USA since 1967. One can see that in the past the PPI and CPI inflation rates were approximately the same. Essentially, they were practically equal between 1975 and 1982. The reason they started to deviate is a dramatic change in their definitions around 1980. The CPI inflation now looks much lower than the PPI.

Figure 1. CPI and PPI inflation rate

To understand the current link between the CPI and PPI one can apply simple regression analysis and obtain regression coefficients which make both curves closer to each other in the sense of RMS distance. Figure 2 depicts the original PPI curve and the corrected CPI_C curve, where

                                            CPI_C = 4.4*CPI-0.067

The regression equation was obtained for data between 2000 and 2022. It means that the PPI is 4.4 times the CPI, but there is a constant in the equation which defines some permanent difference between the CPI and PPI. 

Figure 2. PPI and  CPI infation rate. The latter is corrected to match both curved after 2000

Figure 3 illustrates the most recent period after 2006. One can see that the curves are extremely well correlated (Rsq=0.83) and practically synchronous. The latter observation is important because the change in the prices of commodities has an immediate impact on consumer prices. 

Figure 3. Same as in Figure 2 for the period after 2006

It is clear that the PPI curve demonstrates some pivot to the downward move in December 2021 and January 2022. The growth rate of commodity prices decelerates after it reached the peak of 25% per year. The CPI curve will likely change the direction any time soon in case the PPI growth will continue the deceleration path. 

The same analysis is helpful in the comparison of energy prices. Figure 4 presents the PPI of "Fuels, related products and power"  and the energy CPI after 1967. The CPI is corrected by a factor of 1.55 in order to fit the curves after 2000. One can see a dramatic difference in the curves match compared to Figure 2, where two periods before and after 1983 are quite different. For energy, the curves have an excellent match in both periods. This means that the definition of energy-related CPI and PPI did not change much around 1980.

Figure 4. The PPI of "Fuels, related products and power" and the corrected energy CPI 

Figure 5 illustrates the period after 2000 and demonstrates that the price change in energy-related commodities is reduced by a factor of 1.55 before it comes to the consumers. The most recent period shows the rates of PPI inflation from  -40% to +55%. This is similar to the period between 2007 and 2009. The fuels PPI shows some signs of decline since the end of 2021. The current inflation rate came from the economic recovery processes in 2021 and was also driven by money printing. More money printed and injected into the US economy will reverse the current downward trend in the fuels  PPPI and energy CPI.  If to stop the money printing process the energy price will drop dramatically and one can expect a long deflationary period. The extended supply of extra expensive goods and services will not match the demand without extra money injection. This is the main cause of the recession.

Figure 5. same as in Figure 4 for the period after 2000