What it means
Consumer price indices measure what households pay. A corporate goods price index measures what companies pay each other, which means it captures costs at an earlier stage of the supply chain.
The best-known series carrying this name is published by the central bank of Japan, and similar producer or wholesale price indices exist in most countries. Statisticians pick a basket of goods that businesses commonly buy and sell, record their prices each month and compare them with a base period.
The base period is set equal to 100, so a reading of 110 means prices are 10% higher than in the base period. The index matters because input costs reach consumers with a delay.
If corporate goods prices rise sharply, manufacturers and retailers will eventually be forced either to raise their selling prices or to accept thinner margins. Finance teams use it to adjust long-term contracts, which often include price escalation clauses tied to an index.
They also use it to test budgets, forecast cost of goods sold and judge whether a supplier's price increase is out of line with the market. The nuance is that an index covers a broad average, while your own purchases may be very different.
If your business buys mostly one commodity, the movement of that commodity matters more to you than the headline index, so a sector-specific series is often a better guide. Publication timing is worth knowing as well.
Most agencies release the index monthly, often with a short delay and sometimes with later revisions, so the latest figure may change slightly. Contracts that depend on the index should therefore state which release will be used, such as the first published figure or the final revised one.
In practice
Real-world examples.
Example
A furniture manufacturer signs a three-year supply contract for steel and timber, with prices adjusted yearly in line with a corporate goods price index. When the index rises 5%, the supplier's invoice increases by the same percentage.
Example
A food retailer notices that wholesale prices have risen for four consecutive months. The finance team uses the index to forecast a 2% to 3% rise in cost of goods sold next quarter and starts discussions with suppliers.
Example
A central bank analyst watches the index for early signs of inflation. A steady rise suggests that consumer prices are likely to follow, which influences the bank's interest rate decisions. A company treasurer reads the same data to decide whether to lock in fixed-rate borrowing sooner.
Formula
Calculation
Index = (cost of basket in current period / cost of basket in base period) x 100
Inflation rate = (current index - previous index) / previous index x 100
Suppose a basket of business goods cost $50,000 in the base period and costs $54,000 now. The ratio is 54,000 / 50,000 = 1.08, so the index reads 108. A year earlier the index was 104.
The annual rate of change = (108 - 104) / 104 = 3.85%, which rounds to 3.8%. A manufacturer with a $2,000,000 annual materials bill can therefore expect roughly 2,000,000 x 3.85% = $77,000 of extra cost if its purchases track the index.Case study
Seen in the real world.
Kestrel Components is an illustrative, fictional electronics maker that sold its products on fixed-price contracts. During a year of rising input costs, its margin dropped from 18% to 11% without anyone changing the pricing sheet.
The finance manager compared the firm's purchase prices with a published corporate goods price index and found that wholesale prices of its main inputs had increased by 9%, while its own selling prices were unchanged. The gap explained nearly the whole margin decline.
For new contracts, Kestrel added a clause allowing prices to move with the index every six months. The illustrative result was that margins recovered to about 16% and the company was no longer absorbing every cost increase. Customers accepted the clause more readily than expected because it also allowed prices to fall when the index fell.
Watch out
Common mistakes.
- Reading an index value of 108 as an 8% annual increase, when it only shows the change since the base period, which could be many years ago.
- Assuming the index reflects your own costs, when your basket of purchases may differ from the statistical basket.
- Using the index to predict consumer prices precisely, when the pass-through from business costs to shop prices varies by industry.
Questions
People also ask.
How is CGPI different from CPI?
CPI tracks what consumers pay in shops, whereas CGPI tracks prices at the business-to-business stage, so it is an earlier indicator.
Where can I find the figures?
National statistics offices and central banks publish them, and the name of the series differs by country.
How do I use it in a contract?
Add an escalation clause that adjusts the price by the percentage change in a named index over a defined period.
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