The relationship between the producer price index (PPI) and the consumer price index (CPI) is such that, in the short run
A) the CPI usually increases before the PPI.
B) the CPI and the PPI usually move simultaneously.
C) the PPI usually increases before the CPI.
D) the CPI and the PPI usually move in opposite directions.

Question

Quizplus · Accepted Answer

In the short run, when the cost of production increases, the producer may not necessarily pass that cost onto the consumer immediately. Therefore, the PPI usually increases before the CPI. This is because producers would absorb some of the increased costs initially to maintain their competitiveness in the market. However, over time, as the increased costs become more permanent, producers will eventually pass it onto the consumers, which will reflect in a rise in the CPI.

The Relationship Between the Producer Price Index (PPI) and the Consumer