Bob Richardson

When providing LIFO Election Benefit Analysis results to companies looking to determine the potential benefits of LIFO, we use Producer Price Index (PPI) inflation tracked by the Bureau of Labor Statistics (BLS) to determine the historical inflation the most predominant items within a businesses’ product mix. When a company’s internal price changes are significantly different from PPI, we often find ourselves explaining the reason why this disconnect exists. The key difference to consider is that PPI only measures price changes for products made in the United States, meaning the inflation (deflation) measured within these indexes totally ignores imported products. In contrast, internally calculated price indexes will measure price changes for both domestically produced & imported products.

Items being imported into the US from China often have little or no inflation because Chinese companies typically benefit from significantly lower labor input costs such as employee wages & benefits when compared to other countries. For example, the average manufacturing sector salary in the United States is about $60,000/year. In contrast, China’s average manufacturing sector salary is roughly $10,000/year. The input costs for exported products inevitably face much more upward pricing pressures when compared to products imported from China. The graph below illustrates the following:

  • The Producer Price Index has averaged just over 1% inflation over the past 10 years
  • The Bureau of Economic Analysis (BEA) Export Price Index has averaged 0.5% inflation over the past 10 years
  • The BEA Import Price Index has average 0.3% deflation over the past 10 years


For companies considering a LIFO election, the IPIC method can be used in order to utilize Consumer or Producer Price Indexes (CPI or PPI) to measure the inflation used to calculate the annual change in your LIFO reserve. Many companies take advantage of this opportunity because it allows them to maximize their LIFO benefits. Learn more at our IPIC LIFO Advantages & Good LIFO Candidates pages.