Common Inflation Measurements

assorted hot air balloons flying at high altitude during daytime
by Advice Chaser
by Advice Chaser

The past few years have seen substantial inflation across a number of different indicators. For most of us, it’s enough to hear that inflation is up. But that bare fact does tend to leave some details out. After all, sometimes prices rise in one area while they decline elsewhere. Depending on what you usually buy and invest in, different investment indicators might affect you differently. That’s why it’s worthwhile to learn the different types of inflation measurements and what each one means.

assorted hot air balloons flying at high altitude during daytime

How Inflation Is Measured

If you spot a sign outside a gas station showing a large jump in the price of regular unleaded, you might think inflation is happening. But on the other hand, it might be a gas price increase caused by political unrest and affecting only oil. To really know whether inflation is happening, we must look at a variety of products.

Therefore, most inflation measurements rely on selecting a “basket” of products and averaging the price increase of the whole basket. This might include grocery prices, energy prices, medical costs, and so on. Experts may weight the different items in the basket based on how much the average household spends on each item. After all, you probably spend more on gas in a month than you do on toothpaste, so a gas price hike will affect you more.

But selecting the goods to be in the basket and the weight assigned to each is more of an art than a science. After all, each family has different expenses and preferences. In addition, people’s purchasing decisions change as prices do. So even though different inflation measurements all rely on tracking a selection of goods, the goods they choose vary among measurements.

The Most Common Inflation Measurements

Here are a few of the most common inflation measurements you’ll see. All are expressed in percentages showing growth over time.

Consumer Price Index (CPI)

This measurement is the most common inflation indicator for most purposes. The Bureau of Labor Statistics (BLS) gathers price data on over 80,000 items, from food and energy to rent and luxuries. This is the measurement used to adjust benefits, such as Social Security, to ensure the amount given out keeps up with inflation.

Core CPI

When you hear about inflation “less food and energy,” this is generally the metric used. Why omit food and energy when these are some of a household’s biggest expenses? Because the prices of food and energy are so volatile. So taking the CPI without food and energy may give a more stable, long-term picture by removing sudden spikes in grocery and gas prices.

Personal Consumption Expenditures (PCE)

Instead of focusing on prices at the store, PCE measures what consumers actually spend. This information comes from businesses and trade organizations. It has a few advantages over CPI: it includes more data from rural Americans, it includes institutions rather than just households, and it accounts for the way consumers change their purchase habits over time.

Core PCE 

Like the core CPI, this measurement discounts food and fuel costs from the standard metric. This allows economists to get a longer-term picture apart from the volatility of food and energy prices.

Uneven Inflation 

These measurements of inflation can be a little deceptive. Since they aggregate and average so many different prices, they end up with one number at the end. In reality, different types of goods and services may increase in cost at different rates. Often this imbalance is what makes inflation such a problem. For instance, if the cost of consumer goods rapidly increases while wages remain stagnant, it gets painful fast for the average worker.

Therefore, you might hear inflation broken down into sectors. Energy prices might increase a lot while commodity prices stay low, and that could help some industries while harming others. Two measurements which describe inflation in business costs are the wholesale price index (WPI) and the producer price index (PPI). These measure the costs businesses have to pay to produce and distribute their products.

Over time, however, inflation tends to spread throughout the economy. If consumer costs increase, employees demand higher wages. Likewise if wages increase, businesses find the market will bear higher prices. High real estate costs can get expensive for businesses, which will raise prices to pay for it. Therefore, even though inflation can be unbalanced for a while, high prices in one sector will often spread throughout the economy eventually.

How to Invest for Inflation

Knowing what the inflation numbers mean is only the beginning. Next, you have to learn how to invest in ways that keep pace with inflation. A good financial advisor can help you build an inflation-proof portfolio. To meet the right advisor for you, contact us today.

Interested in more?

Your financial plan is as unique as you are. We partner with businesses all over the U.S., so that we can help you connect with the right options, all at no cost to you.