Inflation Measures

In the figure on the left, the two best known inflation measures since 1960 are displayed. (Click on image for larger display.) The Consumer Price Index (CPI), the dark line has higher high and lower lows, but it rises and falls with the Personal Consumption Expenditures less energy and food (PCE Core) measure.

Consumers in urban areas feel inflation as reflected by CPI, while the Federal Reserve Board has declared that PCE Core more accurately reflects the inflation that its monetary policies can affect. How so? The Fed Funds rate affects economic activity by easing or tightening lending; but inflation in food prices is mainly traced to weather conditions in the growing season and energy prices inflate due to foreign geopolitical decisions.

Since 1960, CPI inflation averaged 3.54% with a standard deviation of 2.8%, while PCE Core inflation averaged 3.24% with a standard deviation of 2.1%. The CPI averaged only 0.3% higher, although with a wider variation of its reported inflation rates. That’s so abstract, let’s look at the most recent inflation.

Pandemic Inflation

The figure on the right focuses on CPI and PCE Core inflation measurements during the pandemic and in its aftermath. Clearly the dark CPI line rose much higher than the red PCE Core dashed line.

Neither measure rose above 2% until a year after the pandemic hit. Then both showed inflation growing until it reached its CPI peak of 9% in June 2022, with PCE Core above 5.25% from early 2022 through October 2022.