Rival Inflation Measures

Last week, we discussed the ways that inflation measures can be selectively interpreted to fit a narrative. Readers of that article raised an even simpler question: Why are there multiple readings of inflation in the first place?

In the U.S., there are two leading gauges. The consumer price index (CPI), published by the Bureau of Labor Statistics, garners attention (in part) because it is more timely, usually published two weeks after the end of the month. The Bureau of Economic Analysis follows a fortnight later by issuing a price index based on personal consumption expenditures (PCE).

A major distinction between the two is their treatment of substitution. Price indices reflect a weighted average of goods and service costs which aim to reflect the spending of a median household. The CPI basket is rebalanced only annually (a recent upgrade from a cycle of every two years). The PCE weights are adjusted every month, based on actual spending. When consumers change their behavior, PCE rebalances quickly.

The Federal Reserve also prefers PCE because it is more comprehensive, capturing a wider set of prices paid by more consumers. PCE can be restated as more information is collected, while CPI is only revised to account for seasonal factors.