OPINION: Although the headline CPI has received the lion’s share of media attention, other inflation measures are important and serve different purposes.
The issue: Measuring inflation—the rate of change in the level of prices—requires comparing the prices of a basket of goods and services over time. While that idea sounds straightforward in principle, measuring inflation in practice is more complicated. What goes into the chosen basket of items whose prices are to be tracked over time and how prices of these different components are combined can vary from one inflation gauge to another.
Versions of the CPI are used to index Social Security benefits, some wage contracts, and some U.S. government bonds. The CPI also is used more informally to gauge changes in the cost of living by households, businesses, analysts, and the media. Because food and energy prices frequently are impacted by special factors—such as weather events or geopolitical instability — and can be quite volatile, analysts often focus on so-called core inflation, which gauges the rate of inflation for all items other than food and energy. In many circumstances when food and energy prices are jumping around, the core measure provides a better read on the underlying trend in inflation. With the war in Ukraine, energy prices surged 41.
The PCE index differs from the CPI in two important ways that make it a preferable measure. First, it uses a formula to combine prices of different items that better captures shifts in buying patterns as consumers shift purchases away from items experiencing big price increases or toward items on sale. Second, it covers a wider set of items.
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