How is Inflation Measured?
Pent-up demand, supply chain disruptions, war-related price spikes, and government spending all pushed inflation rates to 9.1 percent in June 2022, the highest they’ve been in 40 years. But the Federal Reserve’s interest rate hikes have largely brought those high levels down to a more manageable level. Learn more about what drives inflation, how it’s measured, and why it matters in the long run.
The Bureau of Labor Statistics publishes several datasets that track price changes, but the one most commonly referred to is the Consumer Price Index (CPI). This is a weighted index; it represents the cost of an entire basket of goods and services that urban consumers purchase out-of-pocket—everything from eggs to motor fuel. It also includes a variety of fixed items that are not subject to changing prices, such as window and floor coverings, furniture, and information technology equipment. The Personal Consumption Expenditures (PCE) price index, published by the Bureau of Economic Analysis, is more comprehensive than CPI and is weighted by data acquired through business surveys.
While some individual prices are volatile, a sustained period of high inflation can erode purchasing power. A $100 bill bought $97 worth of goods last year, and it will buy only 97 cents next year if inflation is 3%. This loss of purchasing power can contribute to household belt-tightening and pessimism about the economy. The rise in prices can also drive up costs for companies that rely on imported inputs, such as commodities or raw materials. This is called “cost-push” inflation.