Learn how CPI, PPI, core inflation and PCE are calculated, how year-on-year and month-on-month changes differ, and how inflation affects purchasing power, real interest rates, asset performance and debt decisions.
The Measurement Logic Behind Price Indicators
Changes in the overall price level provide the most direct quantitative basis for assessing shifts in the purchasing power of money. Statistical agencies compile these indicators using a fixed basket of goods and services. They reflect the average change in the general price level over a given period rather than the rise or fall of a single product.
In June 2026, China’s consumer prices increased by 1.0% year on year and declined by 0.3% month on month. The core measure, excluding food and energy prices, rose by 1.0% year on year, maintaining a moderate upward trend. During the same period, the national producer price index increased by 4.1% year on year and declined by 0.3% month on month, while industrial purchasing prices rose by 6.4% year on year and fell by 0.2% month on month.
(Source: National Bureau of Statistics of China, Dong Lijuan, Chief Statistician of the Urban Department of the National Bureau of Statistics, Explains the June 2026 CPI and PPI Data, published: 2026-07-09)
How the Calculation Is Expressed
The year-on-year rate of change can be expressed as follows:
Annual inflation rate = (Current-period price index − Price index for the same period of the previous year) ÷ Price index for the same period of the previous year × 100%
The month-on-month rate uses the previous month as the comparison base. The two measures reflect different time horizons: year-on-year data reduce the influence of seasonal factors and are suitable for observing trends, while month-on-month data are more sensitive to short-term shocks and are useful for identifying turning points. Using China’s June 2026 data as an example, a year-on-year increase of 1.0% alongside a month-on-month decline of 0.3% indicates that prices fell during the month but remained higher than one year earlier.
Several Price Indicators That Are Easily Confused
Public reports often cite the consumer price index, producer price index, core price measures and personal consumption expenditures price index together, although their compilation methods and policy implications differ clearly.
| Indicator | Coverage | Main Use | Points to Consider |
|---|---|---|---|
| CPI | Prices of consumer goods and services purchased by households | Measures changes in household living costs and provides a reference for wage and pension adjustments | Includes food and energy, resulting in greater short-term volatility |
| PPI | Factory-gate prices of products sold by industrial enterprises | Reflects upstream production costs and may feed through to downstream consumer prices | Transmission occurs with a time lag and not every increase is passed through in full |
| Core price index | Price changes excluding food and energy | Assesses the underlying persistence of price increases and serves as an important reference for monetary policy | The excluded categories are often those most directly felt by households |
| PCE | All goods and services included in households’ actual consumption expenditure | The Federal Reserve’s preferred measure for assessing progress towards its inflation objective | Weights adjust dynamically to reflect substitution in consumption, and the reading is usually lower than the consumer price index |
Changes in the Price Structure During the First Half of 2026
Breakdown of China’s Data
The decline in domestic prices in June had clear structural causes. Affected by fluctuations in international market prices, domestic gold jewellery and petrol prices fell by 8.7% and 4.9% respectively. Their declines widened by 5.9 and 4.6 percentage points from the previous month and together reduced the month-on-month consumer price reading by approximately 0.22 percentage points. Food prices declined by 0.4% month on month, with fresh vegetable and fresh fruit prices falling by 1.0% and 2.0% respectively. However, a low stock of laying hens combined with reduced egg production during hot weather pushed egg prices up by 7.0%.
The divergence in the industrial sector was more pronounced. On a year-on-year basis, prices rose by 20.6% in coal mining and washing, while non-ferrous metal mining and processing and non-ferrous metal smelting and rolling recorded increases of 25.5% and 23.4% respectively. Among sectors recording price declines, non-metallic mineral products and electricity and heat production and supply both fell by 4.4%, while alcoholic beverages and refined tea manufacturing and automobile manufacturing declined by 5.3% and 2.1% respectively.
Performance of Overseas Data During the Same Period
In June 2026, the US consumer price index increased by 3.5% year on year, compared with market expectations of 3.8% and a previous reading of 4.2%. The core measure rose by 2.6% year on year, below the expected 2.8% and the previous reading of 2.9%. On a seasonally adjusted basis, prices fell by 0.4% month on month, the largest monthly decline since April 2020. The energy price index declined by 5.7% in June, with petrol prices falling by 9.7%, fuel oil prices by 9.2% and electricity prices by 1%. However, because of the earlier comparison base, energy prices were still 15.7% higher year on year.
(Source: US Bureau of Labor Statistics, Consumer Price Index — June 2026, published: 2026-07-14)
Sequence of Events and Industry Effects
Cause: The US–Iran conflict pushed international crude oil prices higher, allowing imported costs to pass through the energy and chemical supply chains. The year-on-year US consumer price index rose to 4.2% in May 2026, while China’s producer price index increased by 3.9% during the same period.
Development: In June, the oil price shock weakened and international crude oil prices declined. US petrol prices fell for four consecutive weeks during the month, with the energy component reducing the overall monthly reading by approximately 0.43 percentage points and explaining almost the entire decline. In China, lower prices across the petrochemical supply chain caused factory-gate prices to turn negative on a month-on-month basis.
Broader effects: Core components also weakened. Monthly US rent growth slowed from 0.3% to 0.1% in June, while automobile insurance, medical services, recreational services and communication services all recorded slower month-on-month growth. Hotel prices posted their largest decline in more than a year after rising for four consecutive months.
Market reaction: Following the data release, US Treasury yields and the US Dollar Index declined, gold prices rose and traders reduced their expectations of further monetary tightening.
Industry impact: Lower energy and chemical costs shifted the cost benefit towards downstream manufacturers. Expectations for financing costs improved in interest-rate-sensitive sectors such as property and consumer credit, while the earnings sensitivity of upstream extraction industries dependent on rising commodity prices began to narrow.
(Source: Sina Finance, Data Commentary | US CPI Cools Across the Board — Review of the June 2026 US CPI Data, published: 2026-07-15)
How to Quantify the Erosion of Purchasing Power
Assessing the Real Interest Rate
The difference between nominal returns and changes in the price level represents the real return on an asset. The calculation can be expressed as follows:
Real interest rate ≈ Nominal interest rate − Inflation rate over the same period
When the nominal interest rate on a bank deposit is lower than the corresponding increase in prices, the deposit balance may rise in nominal terms while the quantity of goods it can purchase actually declines. Using China’s year-on-year consumer price increase of 1.0% in June 2026 as the benchmark, outstanding deposits with nominal rates below this level experienced negative growth in real purchasing power.
The Cumulative Effect of Purchasing-Power Loss
The impact of price changes compounds over time. Assuming an average annual increase of 3%, the decline in purchasing power would follow the path below:
By the end of the fifth year, the real purchasing power of an original 100 monetary units would be equivalent to approximately 86 units at the outset.
By the end of the tenth year, the figure would decline to approximately 74 units.
By the end of the twentieth year, it would fall to approximately 55 units, close to half the original level.
If the average annual increase rose to 5%, the time required for purchasing power to halve would shorten to approximately 14 years.
This calculation demonstrates that the required return for long-term asset allocation cannot be assessed solely using nominal figures. The corresponding rate of price increases should be treated as the minimum benchmark.
Differences in Asset Performance Under Different Price Environments
General Patterns During Periods of Rising Prices
Commodities and energy assets: These have the most direct correlation with price indices, but their volatility is considerably higher than that of other asset classes and they remain highly dependent on geopolitical events and supply-side disruptions.
Precious metals: These combine safe-haven and store-of-value characteristics. In June 2026, the year-on-year increase in domestic gold jewellery prices slowed to 28.1%, indicating that part of the earlier increase had already been absorbed.
Equities: Companies with strong pricing power that can pass higher costs on to downstream customers are relatively resilient, while industries with rigid costs and regulated selling prices face greater pressure.
Fixed-rate bonds: During periods of rising prices and interest rates, both the real return and market value of existing bonds come under pressure.
Corresponding Adjustments to the Debt Structure
A rising-price environment also changes the real burden of debt. The real repayment pressure of existing long-term fixed-rate liabilities declines as the purchasing power of money falls. By contrast, floating-rate liabilities and high-interest short-term debt may place greater pressure on cash flow as interest rates rise at the same time.
Review the interest-rate structure and repricing cycle of existing liabilities, distinguishing between fixed-rate and floating-rate portions.
Compare the nominal interest rate of each liability with the current rate of price increases to identify debts carrying a high positive real interest rate.
Prioritise repayment of liabilities with the highest real interest rates, which are commonly consumer credit and credit-card instalment balances.
Maintain an appropriate liquidity reserve to avoid being forced to sell assets when market prices are low.
Official Sources of Data
The authoritative sources of price data are the official statistical agencies of each economy. In China, the National Bureau of Statistics releases monthly data, usually publishing the previous month’s consumer and producer price figures in the first part of the following month. In the United States, the Bureau of Labor Statistics publishes the consumer price index, while the Bureau of Economic Analysis under the Department of Commerce publishes the personal consumption expenditures price index. Data compiled by third-party platforms can facilitate comparisons, but specific figures and component breakdowns should be verified against the original official releases.
Questions About the Inflation Rate
When year-on-year and month-on-month figures are released together, which should take priority?
The two figures measure different time horizons and should be considered together. In June 2026, China’s consumer prices increased by 1.0% year on year but declined by 0.3% month on month. The year-on-year figure indicates that prices remained higher than one year earlier, while the month-on-month figure shows that prices fell during the month. Month-on-month data are more sensitive when identifying turning points, while year-on-year data provide a more stable basis for assessing long-term changes in purchasing power.
Does excluding food and energy from the core measure understate the actual cost of living?
The purpose of the core measure is to identify the persistence of price increases rather than to replace the headline measure as an indicator of living costs. Food and energy prices are affected by short-term factors such as weather and geopolitical events, making them highly volatile and prone to reversal. In June 2026, the US energy price index declined by 5.7% month on month but remained 15.7% higher year on year, illustrating this volatility. The headline measure, which includes all components, should be used when assessing the actual pressure on household expenditure.
Does an increase in producer prices always pass through to consumer prices?
The transmission is not necessarily complete. In June 2026, China’s producer price index increased by 4.1% year on year, while consumer prices rose by only 1.0%, creating a clear difference between the two. The degree of transmission depends on the pricing power of midstream and downstream companies and the strength of final demand. When demand is weak, companies are more likely to absorb the higher costs through narrower profit margins than to raise prices.
Why do official statistics indicate moderate price growth when individuals feel that prices have risen substantially?
Official indices are compiled using a fixed basket of goods and services and predetermined weights, reflecting an overall average. An individual’s expenditure structure may differ from these weights. If spending is concentrated in categories recording larger increases, the perceived impact will naturally be stronger. In June 2026, food prices in China declined by 1.6% year on year while non-food prices rose by 1.5%, meaning that households with different spending patterns could experience the same data very differently.
Why is an inflation rate of approximately 2% considered desirable?
This figure is the policy objective adopted by many major central banks. A moderate positive rate provides room for monetary policy easing while avoiding the postponement of demand and the increase in the real burden of debt that may accompany persistent price declines. Excessively high inflation erodes household purchasing power and distorts resource allocation, while excessively low or negative inflation may coincide with weaker demand and employment pressure. Monetary policy therefore generally seeks to maintain a small positive rate.
