U.S. Inflation :: Measuring Inflation

Inflation, a rise in the general level of prices caused by excessive money creation, is not an easy thing to measure. Prices for individual items fluctuate constantly for reasons that have nothing to do with inflation, and an accurate measure of inflation must distinguish between these relative price movements and inflation.

Many price statistics are available to keep tabs on average prices. Some, like the Consumer Price Index (CPI) or the Personal Consumption Expenditures index (PCE), track the prices consumers pay for things. Others, like the Producer Price Indexes (PPI), track the prices producers receive for the goods or services they provide. There are broader indexes, like the GDP deflator, which is based on gross domestic product. Some price statistics are more specialized. For example, the Employment Cost Index tracks changes in labor costs, and the International Price Program (IPP) tracks price changes in the foreign trade sector.

Comparing one period's price statistics with some other period's, like the previous month, the previous year, or a designated base period, gives a crude measure of inflation (if the general level of prices has risen) or deflation (if it has fallen). But these measures do not discriminate between relative price changes and inflation, so an increase in the price of a single item, such as energy, may cause a price index to rise. For this reason, many measures of "core" inflation have been developed from the basic price indexes, such as the CPI excluding food and energy, the median CPI, or the core PCE. The term core inflation really has no clear definition, but when people use it, they seem to have in mind the long-run or persistent component of the measured price index, which is tied in some way to money growth. The core measures are discussed in more detail below.

The most well-known price statistics are the CPI, the PPI, and the PCE.

Consumer Price Index (CPI)

The CPI measures the average price of a fixed set (or basket) of goods and services. The basket of goods is intended to reflect all of the items a typical family buys to achieve some minimum standard of living in some base period (currently, 1982-1984). The basket is adjusted every ten years or so. The CPI does not count the price of each item equally but weights each according to its share of total household expenditures in the base period, so that changes in the index from one period to the next are broadly reflective of changes in a representative household's current cost of living. The weightings are determined from detailed expenditure information provided by families and individuals on what they actually bought. For the current CPI, this information was collected from the Consumer Expenditure Survey over the two years 2001 and 2002.

The CPI is compiled monthly by the Bureau of Labor Statistics (BLS). Data collectors survey 23,000 retail and service establishments and 50,000 landlords every month and collect price data on about 80,000 items. The items are grouped into 8 categories:

There are three main CPI series:

Another CPI index economists find useful is the CPI research series:

CPI-Related Links on this site
CPI and inflation data calculated from it can be found for more than 200 other countries here.
You can compare CPI inflation with other measures of inflation for the United States here.

Producer Price Indexes (PPI)

The PPI, which used to be called the Wholesale Price Index, is one of the oldest economic time series compiled by the federal government. The PPI is a family of indexes that measures average changes in the prices domestic producers receive for their output. As such, it measures price changes from the perspective of the seller, as opposed to the consumer. The PPI program covers virtually every industry in the mining and manufacturing sector, some industries in the service sector, and some elements of the agriculture, fishing, and forestry industries and gas and electric utilities. Prices of items are weighted according to their size and importance, first with respect to the establishment that produces an item, then to the particular index being prepared (industry, commodity, or stage of processing).

PPI data are compiled and released monthly by the Bureau of Labor Statistics (BLS). There are three main types of PPI indexes:

PPI-Related Links on this site
PPI data for finished goods can be found here.

Personal Consumption Expenditures (PCE)

The PCE is computed by the Bureau of Economic Analysis from the national income and product accounts (NIPA) on a monthly basis. The PCE provides a measure of the prices paid by people for domestic purchases of goods and services. It is a somewhat broader measure of consumer prices than the CPI.

More from the BEA website: "The index is composed of PCE components that are deflated by either a detailed consumer price index (CPI) or a producer price index. It excludes most imputed expenditures, such as services furnished without payment by financial intermediaries except life insurance carriers, but imputed space rent for owner-occupied nonfarm housing is included in the index. (We note that its inclusion improves comparability with the CPI. Owner's equivalent rent within the CPI is measured by reweighting the renter sample of market transactions.) It excludes expenses of nonprofit institutions serving households, most insurance purchases, gambling, margins on used light motor vehicles, and expenditures by U.S. residents working and traveling abroad. Household insurance premiums, which are deflated by the CPI for tenants’ and household insurance, are included in market-based PCE; medical and hospitalization and income loss insurance, expense of handling life insurance, motor vehicle insurance, and workers’ compensation are excluded.

"Two price indexes are prepared: An overall market- based PCE measure and a market-based PCE measure that excludes food and energy. Current-dollar estimates, chained (2000) dollar estimates, and chained-type price and quantity indexes are shown as addenda items in the underlying detail PCE tables."

PCE-Related Links on this site
PCE data can be found here.

Major Measures of Core Inflation

In North America, the major measures of core inflation are:

(the descriptions below are taken from "Comparing Measures of Core Inflation," by Todd E. Clark)

The Bureau of Economic Analysis also publishes a core PCE measure:

The Bureau of Labor Statistics also publishes a core PPI measure: