Dueling inflation measures

Date posted: June 14, 2011

People are increasingly worried about inflation, but to know if inflation is a problem we have to be able to accurately measure it. N.C. State University economist Mike Walden explains various options.

“Well, there are several measures of inflation out there, but I think most of us are concerned with inflation at the retail level.  And there we’ve got two to choose from: One is the well-known consumer price index, and there’s a second perhaps less well known index called the personal consumption expenditure index.

“Differences between the two: The CPI, consumer price index is based on a what we call a fixed-market basket. That is, the government says these are the things that people buy. We’re only going to change them infrequently.

“The personal consumption expenditure index does vary what people buy and tries actually to keep up with what people buy on a more constant basis.  So, on that reason, I think we’d actually prefer the personal consumption expenditure index.

“In terms of who is covered, the consumer price index only covers households. The personal consumption expenditure index covers households and non-profit businesses.

“If you look at where those indices have been over the last year, the CPI, consumer price index, is up 3 percent. However the personal consumption expenditure index has only been up 1.5 percent.

“The reason perhaps that later index, the PC, is important is that is viewed as the one that the Federal Reserve looks at. And so while many people have pointed to the consumer price index and said, ‘Hey, inflation is going up,’ if you look at the personal consumption expenditure index, you’d say at 1.5 percent, inflation’s still very tame.”

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