Inflation is often seen as a bad thing since it reduces consumer purchasing power. However, it's not all bad.
A little bit of inflation shows that the economy is strengthening. Rising wages should offset the costs of inflation for consumers.
Monthly and quarterly, inflation measures get published by the U.S. government. The main measures used are the personal consumption expenditures (PCE) and the Consumer Price Index (CPI) price indexes.
These indexes, over time, perform differently.
How CPI Works
Labor Department's Bureau of Labor Statistics (BLS) puts together the CPI each month. This index measures changes in prices for goods and services paid by consumers.
The BLS looks at the spending patterns of wage earners and consumers to compile this information. However, Armed Forces members and rural U.S. residents aren't counted on the list.
The CPI takes a measure of the costs of items purchased on a regular basis. Household surveys weigh items according to their relative importance.
However, some items that get measured, like energy and food, tend to be volatile. When you take away the food and energy measures, you're left with the core CPI.
This is a more accurate measure of the real inflation trend.
Another measure, the Producer Price Index (PPI), measures the same thing but from the point of view of the seller.
How PCE Works
The Federal Reserve focuses on keeping employment levels at the maximum and keeping prices stable. The Reserve uses the personal consumption expenditures (PCE) indexes more than the CPI.
The Commerce Department's Bureau of Economic Analysis puts the PCE together. It's seen as a more comprehensive measure because it includes other aspects that the CPI excludes.
In general, the PCE reflects the cost of expenditures made either by households or on behalf of households. Business surveys help determine the weights.
In the CPI index, housing gets weighed more than in the PCE. The PCE, on the other hand, weights the cost of medical care. In both indexes, the costs of energy and food tend to be volatile.
To get the core PCE, again, you have to strip away the energy and food measures. Then, the inflation trend can get measured.