The other inflation measures
CPI is the one in the headlines. It is not the one the Federal Reserve targets, and it is not the one that moves first.
There is no single inflation rate. There is a family of indices, each measuring the prices paid by a different group for a different basket, and they disagree — sometimes by more than a percentage point, persistently.
Consumer price index
CPI measures what urban households pay for a fixed basket, with weights updated periodically. It is the most widely reported, it is what wage negotiations and inflation-linked bonds usually reference, and it is covered in detail in what CPI measures.
Personal consumption expenditures
PCE covers a broader set of spending — including, importantly, healthcare paid for on a household's behalf by employers and government, which CPI largely excludes. It also reweights continuously as spending patterns shift, rather than holding a basket fixed between revisions.
That continuous reweighting captures substitution — when beef gets expensive and households buy chicken, PCE reflects the shift sooner. As a result PCE typically runs somewhat below CPI over long periods. Neither is wrong; they are answering different questions.
Producer prices
PPI measures prices received by domestic producers — what things cost at the factory gate rather than at the till. It excludes imports, includes goods sold to other businesses, and covers stages of production from raw materials through to finished goods.
Input costs eventually reach consumers, so producer prices often turn first. How much passes through, and how quickly, depends on margins, competition and demand. In a weak market firms absorb cost increases; in a strong one they pass them on quickly. Treating PPI as a mechanical forecast of CPI has failed often enough to be a known mistake.
The core versions
Each index has a core variant excluding food and energy. The rationale is not that food and energy do not matter — they matter enormously to households — but that they are volatile and supply-driven, and interest rates cannot increase the supply of oil. Core is a better guide to the underlying trend and a worse guide to what people are experiencing.
Other cuts worth knowing
- Trimmed mean — discards the largest increases and decreases each month, removing outliers without predetermining which categories are volatile.
- Median CPI — takes the middle category, immune to extremes in either direction.
- Services excluding shelter — watched closely as a proxy for domestically generated, wage-driven inflation.
- Import and export price indices — the channel through which exchange rates enter domestic prices.
Why any of this matters
When a policymaker says inflation is at a particular level, the measure determines the number, and the difference between measures can be the difference between a policy response and none. When a headline reports an inflation figure, the measure is usually stated in the release and omitted from the headline.