Meet the measures
Consumer Price Index, or CPI
The CPI, compiled monthly by the Bureau of Labor Statistics, measures the average price of a set (or market basket) of goods and services. The basket reflects all of the items a typical family buys. The CPI does not count the prices of all items equally, but weights each according to its share of total household expenses, so that changes in the index from one period to the next are broadly reflective of changes in a household’s current cost of living. The weightings are determined from detailed expenditure information provided by families and individuals on what they actually bought.
The core CPI excludes food and energy prices, which tend to go up or down quite a bit over a short time period. These items’ sharp, short-term movements can dominate the total, or headline, CPI reading and obscure the more long-term or underlying inflation trend.
The Federal Reserve Bank of Cleveland created the median CPI as a way to measure underlying trend inflation. Instead of calculating a weighted average of all goods and services prices like in the CPI, the Cleveland Fed looks at the median price change—or the price change that’s right in the middle of the long list of all price changes. According to our research, the median CPI provides a better signal of the inflation trend than the CPI, the CPI excluding food and energy, and the core PCE.
Owners’ equivalent rent (OER) is the biggest component of shelter costs, and because of its importance, a measure of OER is very often the median CPI component. OER is published by the Bureau of Labor Statistics to measure implicit rent, or the amount a homeowner would pay to rent or would earn from renting his or her home in a competitive market.
The trimmed-mean CPI, reported monthly by the Federal Reserve Bank of Cleveland, is a measure of underlying trend inflation excluding the components in the CPI that show the most extreme monthly price changes. Excluding 8 percent of the CPI components with the highest and lowest one-month price changes from each end of the price-change distribution results in a “16 percent trimmed mean” inflation estimate. This measure is much less volatile than either the CPI or the more traditional core CPI.
Personal Consumption Expenditures, or PCE
The PCE price index, computed by the Bureau of Economic Analysis, provides a measure of the prices paid for goods and services purchased by or on behalf of households. It is a somewhat broader measure of consumer prices than the CPI, and, due to technical aspects of its construction, the PCE is able to more accurately capture how consumers adjust their purchases in response to relative price changes. The PCE index relies largely on information from businesses, detailing what they’ve sold to households, to produce its weights.
The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices, which can be useful in assessing underlying inflation trends.
The trimmed-mean PCE inflation rate is another measure of trend inflation using the PCE price index. Like the trimmed- mean CPI, the trimmed-mean PCE inflation rate is constructed by excluding the items that had the biggest increases or decreases in a given month. Removing the extreme price changes (both high and low) helps to filter out very noisy price changes in an effort to identify underlying trends in the monthly PCE inflation data. It is calculated by the Federal Reserve Bank of Dallas, using data from the Bureau of Economic Analysis.