Thursday, May 16, 2013

Which Index?

Over the past year, consumer prices rose just 1.5 percent. Excluding food and energy, which jump around a lot, consumer prices rose 1.9 percent. That’s according to the Consumer Price Index of the U.S. Labor Department’s Bureau of Labor Statistics.

The Federal Reserve prefers to use a separate measure of inflation that shows even lower inflation—namely, the price index used by the U.S. Commerce Department in calculating personal consumption expenditures (PCE).

The PCE deflator captures shifts in the pattern of consumers’ spending much sooner than the CPI does. So when consumers shift away from expensive items to cheaper ones, it shows up as lower inflation in the PCE, but not the CPI.