What is the difference between producer prices and consumer prices, and why do traders watch both?

Eurostat reported that euro area industrial producer prices rose 1.9% in August and were 8.2% higher than a year earlier (report). Euro area consumer price inflation was 3.8% in the September flash estimate (report). They are different numbers because they measure different things.

Producer prices measure what factories, miners and utilities charge for what they sell, before it reaches the shop. Consumer prices measure what households pay at the till, including retailers' costs and margins, taxes and services such as rent and haircuts. Producer prices are dominated by goods and energy; consumer prices include many services.

Traders watch both because producer prices can lead consumer prices: a rise at the factory gate may feed through to shelves later. But the link is loose. Firms can absorb cost increases in their margins, and some costs never reach consumers.

In the US the equivalent releases are producer prices and CPI.

Please explain it as simply as you can:

• How would you describe the difference to a new trader, perhaps by following a loaf of bread from the farm to the shop?
• Why do you think producer prices can be much higher than consumer prices at the same time?
• Do you check producer prices before consumer prices, and has it helped?
• What other price measures do you look at?

CPI explained covers the consumer side in detail.

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