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.
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:
- Food and beverages
- Medical care
- Education and communication
- Other goods and services
There are three main CPI series:
- CPI for all urban consumers (CPI-U). This is the most frequently reported statistic in the media. It is based on the buying habits of the residents of urban or metropolitan areas in the United States, a segment of the population which accounts for about 87 percent of the U.S. population.
- Chained CPI for all urban consumers (C-CPI-U). This index applies to the same target population as the CPI-U. The same raw data are used, but a different formula is employed to calculate average prices. The chained CPI was developed to overcome a shortcoming of the CPI-U series, which does not account for the changes that people make in the composition of goods that they purchase over time, often in response to price changes. The alternative method of the C-CPI-U is intended to capture consumers' behavior as they respond to relative price changes.
- CPI for urban wage earners and clerical workers (CPI-W). This is a subset of the CPI-U group and represents about 32 percent of the total U.S. population.
Another CPI index economists find useful is the CPI research series:
- CPI research series (CPI-U-RS). When a change is made in the way the CPI is calculated, the BLS does not revise previously published CPI data using the new method. But the BLS does publish a methodologically consistent series, the CPI research series, for those interested in studying price trends over longer periods. The series provides estimates, for the period since 1977, of what the CPI would have been had the most current methods been in effect. It is updated whenever new methods are introduced. The full name of the research series is CPI-U Research Series Using Current Methods.
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:
- Industry-based. More than 600 industry price indexes in combination with over 5,000 specific product line and product category subindexes.
- Commodity-based. More than 2,000 commodity price indexes organized by type of product and end use.
- Stage-of-processing based. Aggregate price indexes organized by stage of processing--finished goods, intermediate materials, and crude materials.
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.|
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)
- CPI excluding food and energy. The most commonly used measure of core inflation is the CPI excluding food and energy, published by the BLS. [The term "core CPI" is often used to refer to this measure.] This measure of core inflation systematically excludes food and energy prices because, historically, they have been highly volatile. More specifically, food and energy prices are widely thought to be subject to large changes that often fail to persist and frequently represent relative price changes. In many instances, large movements in food and energy prices arise because of supply disruptions such as drought or OPEC-led cutbacks in production. [You can find core CPI data for the United States here.]
- Trimmed mean. The trimmed mean removes from overall CPI inflation all large relative price changes in each month, with the set of excluded components changing from month to month. In particular, the trimmed mean excludes the percent changes in price that rank among the smallest or largest (in numerical terms) changes for the month. Both small and large percent changes represent large price movements relative to the average for the month. The rationale for the trimmed mean is partly statistical, … [partly] economic. [You can find trimmed mean CPI data for the United States here.]
- Median CPI. The median CPI trims all but the midpoint of the distribution of price changes. If, for example, the overall price index included 100 components with equal relative importance, the median CPI would simply be the 50th largest percent change in price. The statistical and economic rationale for the median CPI is the same as for the trimmed mean. [You can find median CPI data for the United States here.]
- CPI excluding energy. Although not commonly used as a measure of core inflation, a potentially useful alternative to the CPI ex food and energy is the CPI excluding just energy. Also published by the BLS, this core indicator excludes energy prices for the same reasons the CPI ex food and energy does. But food prices—which include prices of food away from home and prices of food at home—remain in the index, on two grounds. First, the rate of change in the cost of food away from home is very stable. As a result, the food away from home component of the CPI is unlikely to be subject to large relative price changes and may well be persistent enough to have important predictive power for future inflation. Second, the food at home component has become a less important source of volatility in the CPI. The relative importance of food at home—in effect, the weight of food at home in the CPI—has declined sharply, from 17.8 percent in December 1967 to 9.6 percent in December 2000. As a result, a large change in food-at-home prices affects overall CPI inflation much less today than it would have 30 years ago. Moreover, the variability of food-at-home prices has declined over time, even abstracting from the unusual inflation developments of the early 1970s through the early 1980s.
- CPI excluding 8 components. Even if the overall food and energy price components of the CPI are viewed as being highly volatile, some specific food and energy items are much less variable than others, while some nonfood and nonenergy prices are highly volatile. Within energy, the volatilities of fuel oil and motor fuel far exceed the volatility of natural gas and electricity…Similarly, prices of fruits and vegetables vary much more over time than do prices of dairy products or cereals and bakery products. At the same time, infants’ and toddlers’ apparel, public transportation, and used cars are some of the most volatile components of the CPI.
The Bureau of Economic Analysis also publishes a core PCE measure:
- PCE excluding food and energy. [You can find PCE excluding food and energy data here.]
The Bureau of Labor Statistics also publishes a core PPI measure:
- PPI excluding food and energy. [You can find PPI excluding food and energy data here.]