Core points

●Indices such as CPI, PPI and PMI can effectively observe economic activity.

●CPI and PPI are indices based on price changes, reflecting price changes on the consumer side and the production side.

●PMI is an index reflecting macroeconomic expansion or contraction, and 50 is the dividing line between boom and bust.

Concept understanding

Consumer Price Index (CPI), producer Price Index (PPI) and Purchasing managers Index (PMI) are three important indicators to measure the macro-economy.

CPI reflects the changes in the prices of products and services related to residents' lives, and is usually used to observe inflation and deflation. The range of products or services covered by the CPI index of different countries and regions is obviously different, and the weights of different sub-items are also different. The short-term rise and fall of CPI directly reflects the current economic environment. The greater the increase in CPI, the more obvious the inflation situation.

PPI reflects the price changes in the production process of industrial enterprises, and is used to measure the cost of raw materials and labor services purchased by enterprises for production. The proportion of sub-items of PPI varies in different countries and regions, but basically covers the price changes of raw materials, intermediate products and finished products in three stages.

There is obvious linkage relationship between PPI and CPI. Generally speaking, in the continuous upward period of PPI, production enterprises can more or less transfer part of the price changes to consumers, thus driving the rise of CPI.

PMI is an index that reflects whether the economy is expanding or shrinking through a survey of purchasing managers. It is generally divided into manufacturing PMI, service PMI, construction PMI and so on. PMI covers new orders, production, distribution, inventory, backlog orders, employees and other aspects, with 50 as the dividing line, PMI above 50 represents economic expansion, the higher the higher, the better the economic expansion, the lower 50 indicates economic contraction and decline, and the lower the index, the more depressed the economy.

How to observe CPI, PPI, PMI

CPI, PPI and PMI are all important economic data, which not only reflect the macroeconomic situation, but also are important reference factors for national policy-making.

In the United States, for example, CPI in the United States rose 1.3% month-on-month in June 2022, up 9.1% from a year earlier, much higher than market expectations and the biggest year-on-year increase since November 1981. CPI shows that the inflationary situation in the United States is extremely serious, and central banks around the world continue to raise interest rates to cope with the continuing inflationary impact at home.

PPI maintains a positive upward trend, which to some extent reflects economic activity. In the period of economic recovery in the post-epidemic era, the demand for production has increased, leading to the continuous improvement of enterprise production. However, if PPI remains high due to raw material prices, supply and demand balance, currency and other factors, it will have a negative impact on economic growth. If the scissors gap between PPI and CPI continues to increase, the transmission of price increases is inevitable, downstream corporate profits will be squeezed, and consumer prices will affect residents' lives and other aspects.

PMI, which is more targeted than PPI, is also concerned by national policy makers and market participants. The PMI of US Markit manufacturing industry reached a 23-month low of 52.4 in June, while the PMI of Markit service industry reached a five-month low of 51.6 in June. Although the manufacturing PMI is still above the 50 rise and fall line, it expanded at its slowest pace since early 2022, with growth slowing significantly in some sectors of the economy, particularly manufacturing activity. Against a backdrop of high inflation, rising interest rates, slowing demand and supply chain concerns, companies have downgraded their forecasts for the economic outlook for the coming year, with deteriorating forward-looking indicators heralding a contraction in the third quarter.

Summary

In the world's major economies, CPI, PPI and PMI are important indicators that are compiled and published on a regular basis. Observing the changes of these indicators can effectively analyze the economic environment, observe the inflation situation, and help investment decisions.