How Does Inflation Travel from the Factory to Your Wallet?

CPI and PPI frequently appear in economic news. Both track prices, but they observe different parts of a transaction. To understand how inflation affects everyday life, we first need to distinguish the seller from the buyer.

CPI measures what consumers pay

The Consumer Price Index tracks the prices households pay for goods and services, including groceries, petrol, rent and airfares. It asks how much more a basket of everyday purchases costs than before.

PPI measures what producers receive

The Producer Price Index tracks the selling prices received by domestic producers of goods and services. It helps us understand price changes in production and distribution. A business's selling price is related to the cost of its inputs, but the two are not the same thing.

How do higher costs reach consumers?

When raw materials or energy become more expensive, a business can raise its selling price or absorb part of the increase through its profit margin. If it raises prices, the next buyer's procurement costs may increase and eventually affect the price consumers pay. The size and timing of that effect also depend on competition, demand and contract terms.

The gap between the indexes is not a measure of lost profit

The original article recorded these readings for June 2026: final-demand PPI rose 5.5% year on year, while CPI rose 3.5%. The two figures describe different baskets, with different coverage and weights. Their two-percentage-point gap therefore does not, by itself, tell us how much cost businesses absorbed or how much profit they lost.

To study inflation, we need to observe both producers and consumers. To determine whether businesses are absorbing costs, we also need industry-level information on prices, costs and profits.