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Fed Alphabet Soup

     The Federal Reserve Board of Governors has been seemingly holding investors hostage as each piece of economic data is released. Even worse we've been deluged in a sea of economic acronyms. CPI, PCE, GNP, PPI, GDP, ECI, etc. What do they all mean and how do they affect how the economy is doing and where the stock market is going? CPI and PPI are the Consumer Price Index and the related Producer Price Index. They represent the cost of a basket of goods at either the consumer or producer level. If raw materials to manufacturers go up then the conclusion is consumer prices will increase to cover the increased cost of materials. An increase in the cost of a basket of consumer goods is a blatant statement of inflation. The PPI measures the costs of metal, oil, and lumber along with a number of other commodities at the wholesale level, but doesn't measure the cost of services. The PPI report is divided into three parts covering crude, intermediate and finished goods, with the finished goods being weighed most heavily. The PPI report is released on the 11th day of each month at 8:30am. The CPI measures the price of a fixed basket of goods purchased by the average consumer. These goods include shelter, utilities, food, transportation, clothing, medical care, and entertainment. The CPI is reported monthly by the Bureau of Labor Statistics.

    The ECI and PCE are two more items in the bowl of alphabet soup. The ECI is released quarterly and is the Employment Cost Index. The ECI is both the cost or wages and benefits paid employees. Employees may not see an increase in pay but an increase in the cost of benefits can push the ECI higher. Higher employment costs can lead to a serious rise in inflation. The PCE is the Personal Consumption Expenditure. Personal consumption is all spending on all consumer goods and service, including durable and non-durable goods. Purchases of durable and non-durable goods figures are partially drawn from the retail sales report, which is another indication of how fast the economy is running. Durable goods are items expected to last for three or more years. Not to be confused with the Durable Goods Report, which is yet another report, highlighting only durable goods purchases and orders for future delivery by consumers and industry.

    The GNP and GDP are the Gross National Product and the Gross Domestic Product. They are similar but with some subtle differences. GDP is the broadest measure of the value of all the goods and services provided inside the borders of any nation within a year. The U.S. GDP is reported quarterly by the Commerce Department. GDP differs from GNP in that it measures output produced in the U.S. regardless of company ownership. GNP measures the goods built by U.S. owned companies and consumed in the U.S. regardless of where it is manufactured. A Ford truck built in Canada and put into service in the U.S. would increase GNP. A Toyota or Honda vehicle built in the U.S. would increase GDP, which is the sum of all goods produced here, but they wouldn't increase GNP because the production accrues to non-U.S. companies.

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