Whenever news stories mention the “core inflation rate,” they are referring either to Core CPI or Core PCE. To minimize volatility, the BLS strips away certain goods and services (e.g., certain energy and food prices) to get a better sense of core inflation. Despite this flaw, CPI persists because it is tied to certain financial transactions and is used by government agencies to adjust income and poverty levels based on inflation. It tracks average percentage change in prices for over 200 items for roughly 90 percent of the population.īecause CPI is unable to model consumer behavior and tends to magnify price volatility, the Federal Reserve does not use CPI to gauge the underlying trend of inflation. This is the figure you see in every news story. The Consumer Price Index for Urban Workers-often simply called CPI in the news-measures the buying habits of people who live in urban or metropolitan areas in the United States. If you want to explore the difference between the CPI and PCE further, we recommend reading this excellent 2014 article by the Federal Reserve Bank of Cleveland. The chart below condenses some of the differences between the two major indexes and their respective flavors. The key question that everyone is trying to answer is, “How much less is a dollar worth now than it was a year or a month ago?” Two indexes in two flavors People drive less, buy chicken instead of beef, defer purchases, and cut back on discretionary spending.
The Bureau of Labor Statistics (BLS) produces the Consumer Price Index (CPI), and the Bureau of Economic Analysis (BEA) creates the Personal Consumption Expenditures price index (PCE). To accomplish this, two federal agencies have developed different methodologies. The goal of all inflation indexes is to track the changing cost of goods and services over time.
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How to Calculate a Cost-of-Living-Adjustment (COLA).Two Major Pressures on Wages for Church Employees.To supplement this article, consider these additional resources: If you already understand inflation indexes, skip ahead to our summary of data on COLA, inflation, and wage increases at the bottom. This article is designed to help you cut through the headlines and make an informed decision based on all the facts. Someone on your leadership team will quote a figure of 8.7 percent from recent headlines during budget season.
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