Inflation - How is it measured ?
There are 3 primary tools used to measure inflation: Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures (PCE) price index. The CPI is used as a measure of inflation and to adjust various economic statistics, such as wages and benefits, for changes in the cost of living. The PCE is used as a measure of inflation and to inform monetary policy decisions by the Federal Reserve. The PPI is used as a measure of inflation at the wholesale level and can provide insight into the pressures on businesses to raise prices.
Consumer Price Index (CPI) - “Cost of Living”
The Consumer Price Index (CPI) is a measure of the average price change of a basket of goods and services consumed by households. It is one of the main measures of inflation in the United States and is used to adjust various economic statistics, such as wages and benefits, for changes in the cost of living.
The CPI measures the price change of a basket of goods and services consumed by households, including durable goods (such as cars and appliances), non-durable goods (such as food and clothing), and services (such as healthcare and education). The basket is based on household consumption patterns and is designed to reflect the types of goods and services [whiskey and cigarettes] that people buy .
The CPI is calculated by the Bureau of Labor Statistics (BLS) using data from a variety of sources, including retail stores, service providers, and manufacturers. The BLS collects price data from a sample of outlets and uses this data to determine the average price change of the goods and services in the CPI basket.
Advantages of the CPI
One of the key advantages of the CPI is its widespread use and recognition. It is the most well-known measure of inflation and is used by policymakers, businesses, and individuals to understand changes in the cost of living and make informed economic decisions.
The CPI is also used to adjust various economic statistics, such as wages and benefits, for changes in the cost of living. This helps to ensure that these statistics accurately reflect changes in the cost of living over time.
Overall, the CPI is an important measure of inflation that is widely used to understand changes in the cost of living and make informed economic decisions.
Personal Consumption Expenditures (PCE) price index
The Personal Consumption Expenditures (PCE) price index is a measure of the average price change of goods and services consumed by individuals. It is one of the primary methods to measure inflation in the United States and is used by the Federal Reserve to inform its monetary policy decisions.
The PCE also measures the price change of a theoretical “basket of goods and services” consumed by households, including durable goods (such as cars and appliances), non-durable goods (such as food and clothing), and services (such as healthcare and education). The “basket” is based on household consumption patterns and is designed to reflect the types of goods and services [whiskey and cigarettes] that people buy.
The PCE is calculated by the Bureau of Economic Analysis (BEA) using data from a variety of sources, including the Bureau of Labor Statistics (BLS), the Census Bureau, and other government agencies. The BEA collects price data from retailers, service providers, and manufacturers, and uses this data to determine the average price change of the goods and services in the PCE basket.
Advantages of the PCE
One of the key advantages of the PCE is its comprehensive coverage of household consumption. It includes a broad range of goods and services, including those that are not included in other measures of inflation, such as the Consumer Price Index (CPI). This makes it a more accurate reflection of the changing cost of living for households.
The PCE is also based on a more current and representative sample of prices than the CPI, which uses data that is collected over the course of a year. The PCE uses data that is collected on a monthly basis, which allows it to more accurately capture short-term price changes.
Overall, the PCE is an important measure of inflation that is widely used by policymakers, businesses, and individuals to understand changes in the cost of living and make informed economic decisions.
How are CPI and PCE Different ?
The Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index are both measures of inflation that track the average price change of a basket of goods and services consumed by households. However, there are some key differences between the two measures:
Coverage: The CPI and PCE cover a slightly different set of goods and services. The CPI includes a broader range of goods and services than the PCE, which means that it is a more comprehensive measure of household consumption.
Weighting: The baskets of goods and services used to calculate the CPI and PCE are based on different consumption patterns. The basket used to calculate the CPI is based on the consumption patterns of urban wage earners and clerical workers, while the basket used to calculate the PCE is based on overall household consumption patterns.
Usage: The CPI is used as a measure of inflation and to adjust various economic statistics, such as wages and benefits, for changes in the cost of living. The PCE is used as a measure of inflation and to inform monetary policy decisions by the Federal Reserve.
Calculation: The CPI and PCE are calculated using price data collected from different sources. The CPI is based on price data collected from a sample of retail stores, while the PCE is based on price data collected from producers, retailers, and service providers.
Producer Price Index (PPI)
The Producer Price Index (PPI) is a measure of the average change in prices received by domestic producers for their output. It is a measure of inflation at the wholesale level and is used to understand the pressures on businesses to raise prices.
The PPI measures the price change of a basket of goods produced for intermediate and final demand, including finished goods (such as cars and appliances), intermediate goods (such as parts and components), and crude goods (such as raw materials). The basket is based on the production side of the economy and is designed to reflect the types of goods that businesses produce.
The PPI is calculated by the Bureau of Labor Statistics (BLS) using data from a variety of sources, including producers, wholesalers, and manufacturers. The BLS collects price data from a sample of firms and uses this data to determine the average price change of the goods in the PPI basket.
Advantages of the PPI
One of the key advantages of the PPI is its ability to provide insight into the pressures on businesses to raise prices. By tracking changes in the prices received by producers, the PPI can help policymakers and businesses understand the factors that are driving changes in wholesale prices.
The PPI is also used to adjust various economic statistics, such as contract escalation clauses, for changes in the cost of goods and services. This helps to ensure that these statistics accurately reflect changes in the cost of production over time.
Overall, the PPI is an important measure of inflation that is widely used to understand changes in the cost of goods and services at the wholesale level and the pressures on businesses to raise prices.
Comparison and Contrast: CPI, PPI, and PCE
There are some key differences between these three measures of price change:
Coverage: The CPI and PCE cover a broader range of goods and services than the PPI, which is limited to goods produced for intermediate and final demand.
Weighting: The basket of goods and services used to calculate the CPI and PCE is based on household consumption patterns, while the basket used to calculate the PPI is based on the production side of the economy.
Usage: The CPI is used as a measure of inflation and to adjust various economic statistics, such as wages and benefits, for changes in the cost of living. The PCE is used as a measure of inflation and to inform monetary policy decisions by the Federal Reserve. The PPI is used as a measure of inflation at the wholesale level and can provide insight into the pressures on businesses to raise prices.
Calculation: The CPI and PCE are based on price data collected from a sample of retail stores, while the PPI is based on price data collected from producers.
