As every household knows, there is no one way to measure inflation.
If you haven’t been in the market for a new or used car or buying plane tickets, you may be wondering why inflation is in the headlines, and which measurement of inflation matters.
The most important monthly inflation gauge for the government agency with the mission of fighting fast rising prices is due out Friday in the week ahead.
The Personal Consumer Expenditure Price Index is a name only bureaucrats and economists can love. Despite its clunky title, it is a very nimble measurement of general prices. The PCE is like its better-known cousin, the Consumer Price Index measurement of inflation. While the CPI is used for cost-of-living adjustments, the PCE is what the Federal Reserve prefers to look at to judge pricing trends when deciding monetary policy.
The June PCE showed prices were rising at the fastest annual pace since 1991, yet slower than what the CPI showed during the same month. That snapshot reflects differences in the two gauges. For instance, housing costs are less important to the PCE and medical costs are more important compared to the CPI. The PCE is based on prices of what companies are selling while the CPI uses the prices paid by consumers.
The Fed, and the bond and stock markets are convinced the pandemic-induced higher price trends are temporary. That confidence needs to be rewarded with early evidence price pressures are easing. There was little proof of that with the headline consumer prices last month. However, what contributed to the consumer price jumps changed considerably. Used vehicle prices and airfares fell from June.
Friday’s release of the PCE data won’t provide a final verdict if the price trends are transitory or not. However, any evidence of moderating price pressures will be important to support the Fed’s conviction that strong inflation won’t stick around.
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