Inflation – How it’s measured

Inflation is the silent force that eats away at your purchasing power every day. It does not sleep, it does not rest, it keeps coming all the time. It reduces the value of your savings, and eats at your pocketbook every time you buy something. For most Americans that word enters your household through price tags at the store, the rent due each month, or the spikes in utility, subscription, and insurance bills. Headlines tell different stories like “inflation is going through the roof” or “Inflation is easing”, sometimes at the same time! Yet, even when the rate slows, the prices remain higher than before, and individual experiences can diverge sharply from official reports. The news often comes with confusing terms like Headline Inflation, or Core Inflation and they discuss it in “nominal” and “real” terms or use acronyms like CPI and PCE. If you’re confused, you are NOT alone. This is the language used by Economists, Investment Bankers, and Central Bank figures that are looking to measure different parts of inflation, trying to be as accurate as possible. This article dives into those areas to help explain inflation metrics, so you can understand what is happening, why, and how each of these terms are used so hopefully you can make more informed decisions.

What is Inflation?

To help set a baseline for our discussion, lets define inflation. Here is how Webster’s Dictionary defines Inflation:

inflation noun

in·​fla·​tion in-ˈflā-shən 

1 : an act of inflating : a state of being inflated: such as

a : distension

b : a hypothetical extremely brief period of very rapid expansion of the universe immediately following the big bang

c : empty pretentiousness : pomposity

2 : a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

In simple terms, inflation is an increase in the cost of goods and services. As prices increase, the purchasing power of your money decreases. When inflation is low and prices are stable that is thought to be good overall. It helps businesses stabilize labor costs, and lowers the value of debt. However, higher or more volatile inflation is something that negatively impacts everyone, and governments and central banks around the world pay close attention to inflation to order to manage it careful to ensure stable prices. Economist use a few different terms to describe why inflation is occurring.

• Demand Pull – When there is high demand, and demand exceeds supply prices increase. You can see this effect in action around Christmas time when the latest game console, or in demand toy is hard to find and prices jump dramatically. Some of the causes:
  • Higher consumer demand and spending
  • Increased Money Supply
  • Government Spending
• Cost Push – When the supply cost to produce goods and services increase suppliers pass these costs onto consumers. You saw this in the 70’s with the oil embargo, and during COVID with the supply chain issues. Some of the causes:
  • Higher Material Costs
  • Higher Wages/Labor Costs
  • Increased Taxes or Regulations
  • Disruptions in the Supply Chain

Why Inflation Feels Different Than the Headlines

When you watch the news and they say inflation is up, and they give a number or that it is dropping – if that feels different than what you are experiencing, you are not alone. Every person has their own lived reality, where you live, where you work, your life style, your spending mix (groceries, housing, gas, health care, etc.) are all different and they matter when it comes to how inflation is impacting you. Unsurprisingly, you are unique, and the challenge with metrics is that they attempt to capture large swaths of different areas that produce data that turn into macro metrics that are supposed to represent different groups that may have little to do with your unique situation. For example is you are an professional in finance or technology in an urban metro center than there maybe a higher likelihood of you being a closer match to the CPI Urban index (CPI-U) than someone in a Rural area in the Agriculture, or Manufacturing sector who may more closely track to the CPI Wage Earners and Clerical Workers (CPI-W) index.

Most recently in 2024 we had some significant increases in inflation in a short period. When inflation has a period of rapid rise like that, and then cools off and the rate of inflation slows, you are still at a higher price base than before even if the rate of inflation is lowering. It is little consolation when Politicians say inflation is lowering when costs have already risen and your wages haven’t kept up. So in part, the challenges with inflation are both a communication issue in how to empathize and understand someone’s individual experience with inflation and a technical one on how to capture that impact with metrics and data. This is not to say that the hard working and intelligent people capturing this data are wrong, these metrics are useful at capturing macro level changes over time that are helpful to guide decisions and course corrections for the nation overall. However, in the context of if they match your experience, sometimes for a great number of people, they often do not. In fact there are many articles and stories of exactly the same, and some groups have even created their own tracking that shows some of the disconnect and are worth further review. Here are a few terms to help you understand the inflation landscape, and what they mean.

Inflation Concepts

Headline vs. Core Inflation

When the News mentions inflation, it’s usually referring to “Headline” inflation – the total change in prices for all goods and services tracked by an index known as the Consumer Price Index or CPI. Sometimes they will differentiate and use the word “Core” inflation and this is the same as CPI except it excludes food and energy prices and is known as Core CPI. Why the need? Because those categories (food and energy) tend to have volatile pricing, and to understand the underlying trends of inflation as a whole Economists want to remove the noisy volatile part to see if everything else is rising or just the volatile components. Policymakers use Core inflation to judge long-term patterns, knowing that food and energy prices swing widely with supply shocks, global events, or weather.

Real vs. Nominal: The Dollars You See vs. Your True Buying Power

Two simple but critical terms you should know to help you understand inflation’s impact and how Policy and Economists discuss inflation: “Nominal” refers to the actual dollar amounts seen in your paychecks and bills. This is the non Inflation adjusted amount, and the prices you see every day. While “Real” means the dollars after adjusting for price changes, this is the Inflation adjusted amount. If your wages go up 4% but inflation rises by 3%, the Real increase in purchasing power is only 1%. Real Inflation indexes allow economists, government agencies, and citizens to compare the true value of money over time. For example the purchasing power of $1 in 1930 was the equivalent of $19.34 in 2025 dollars.

Seasonal vs Non Seasonally Adjusted

Similar to Real and Nominal, Seasonal and Non Seasonal are adjustments to the inflation data but are not made for the impact of inflation over periods of time but seasonally within a year due to different buying habits and supply differences each season. Non Seasonally Adjusted (NSA) inflation numbers are the raw numbers they do not adjust for inflation. If Gasoline prices are higher in summer because more people are driving, they do not adjust them. Similarly if fresh produce food prices drop in summer because of abundant supply during the summer months, or if energy prices increase during winter when more people are consuming for heat they do not adjust. Seasonally Adjusted (SA) inflation prices are adjusted, and statistical methods are used try to smooth out and normalize these seasonal difference. This is the number used by most economist and policy makers as it gives a more stable reading of inflation without seasonality.

Chained vs Fixed (Unchained) Weighting

Chained and Fixed Weighting are both methods to capture inflation but they differ in how they measure consumer behavior when prices change. Specifically the substitution effect, or when the price changes does user behavior change with it or does it stay the same and the answer to that question determines the weighting. For example, if beef prices rose dramatically it is reasonable to assume that there maybe some consumer behavior shifts causing some to substitute chicken versus beef. Chained Weighting would evaluate that type of change and not overweight beef, and capture the change in consumer behavior. On the other hand Fixed Weighting remains the same, and does take into account possible changes in user behavior.

Inflation Metrics

One of the most confusing parts of inflation is how it is measured and tracked, not just the terminology but also the fact that there are so many different ways to measure and track it. When you someone mentions inflation they are probably talking about Headline inflation, but not always and these terms are thrown around all the time in different contexts. In the United States there are over a dozen different metrics tracking different forms of inflation. Fortunately, we’re going to help break it all down for you – we’ll discuss each of the individual metrics, and the groupings and who produces them and what they represent. To start the most prevalent metrics in use for inflation are from the U.S. Government, and they primarily come from 2 agencies. The first is the Bureau of Labor and Statistics (BLS) an agency within the Department of Labor. They produce the most common metric known as the Consumer Price Index (CPI) known as the “Headline” inflation metric. The other major agency is the Bureau of Economic Analysis (BEA) an agency within the Department of Commerce. They produce the Personal Consumption Expenditures (PCE) metrics, often used by other agencies like the Federal Reserve. Each of these major metrics (CPI and PCE) has groups of related metrics that provide different variations to help Economists understand the nature of inflation from different angles. Here are the major groupings:

• CPI (Consumer Price Index): The CPI grouping of metrics is calculated by the Bureau of Labor Statistics (BLS), the index tracks the cost of a fixed basket of goods and services bought by urban households. There are a few versions of CPI, but when someone says CPI generically, or Headline inflation, or just Inflation they usually are using CPI-U which is for all urban consumers; There is another metric that tracks urban Wager Earners & Clerical workers called CPI-W is used to adjust Social Security payments. It is a subset of CPI-U that tracks the price changes specific to those who work in clerical, sales, craft, service, or other blue-collar occupations. They are not salaried professionals, managers, or self-employed. This was originally created in the early 19th century to track industrial workers.
  • CPI Methodology
    • Direct costs – focus on out of pocket, direct expenses
    • Fixed Basket – constant weighting of basket of goods over 2 years
    • Collection Method: Household survey
• PCE (Personal Consumption Expenditures): This index, preferred by the Federal Reserve, is managed by the Bureau of Economic Analysis (BEA). It covers direct and indirect expenses (like employer-paid health insurance), updates spending patterns more frequently, and uses “chain-weighting” to reflect how buyers substitute when prices shift. Because of this dynamic approach, and that it captures more of the cost it is the reason why the Fed uses it to more accurately model people’s behavior.
  • PCE Methodology
    • Direct & Indirect costs – capture out of pocket costs and other employer paid expenses like Medicare.
    • Chained Weighting – adjust the basket of good to weight for changing consumer habits. If beef prices go up and people substitute chicken, PCE captures the shift in behavior and does not overweight beef.
    • Collection Method: Business survey
• Producer Price Index (PPI): This index tracks prices received by businesses for their output, not what consumers pay, but what companies charge producers (Business to Business). This measures what business pay for supplies wholesale before the retail/consumer market. Often called the “Factory Gate” Index because it measures the cost inputs for supplies to business before they are distributed to consumers. This is often considered a leading indicator as PPI often shows price pressure before reaching consumers.
• GDP Price Index & Gross Domestic Purchases Index:
  • GDP Price Index measures inflation by capturing changes in the prices of all goods and services produced within the United States, including exports but excluding imports. It reflects the cost of production and output of the national economy, helping assess real economic growth by adjusting for inflation by what the country produces.
  • Gross Domestic Purchases Price Index measures the prices of all goods and services purchased by U.S. residents, including imports but excluding exports. It provides a broader view of inflation from the perspective of what Americans actually buy, capturing price changes in domestic and foreign goods and services consumed within the country.

Types of Inflation Metrics

This table provides a summary of the different Inflation metrics in the US (there are many more, but these are the primary). Importantly, it gives a description of what it is used for and what it covers. It has a description of the products that are covered (often called the basket of good) and how it is weighted (The percentage amount of each category in the metric). From this you can get a better sense of how the metrics are derived, and which impact you most, and how they might changed based on different inputs.

For detailed information on the basket of goods and their weightings in CPI, or PCE expenditure breakdowns in more detail see these.

• BLS Relative Importance Tables (CPI Category Weights):
  https://www.bls.gov/cpi/tables/relative-importance/
  This page provides detailed tables showing the relative importance (weight) of CPI components for various CPI versions.
• BEA Personal Consumption Expenditures (PCE) Expenditure Breakdown:
  https://www.bea.gov/data/personal-consumption-expenditures-price-index
  This page includes detailed PCE price indexes and expenditure breakdowns, with supporting data and documentation.

Inflation Indexes

Consumer Price Index (CPI-U) and Core Consumer Price Index (Core CPI)

Personal Consumption Expenditures (PCE) and Core Personal Consumption Expenditures (Core PCE)

Who Uses Which Index and Why?

Our Government and various organizations use different metrics for various components that effect American’s everyday lives. Here is a cheat sheet of who uses what?

How to Pick the Right Index for Your Situation

Here is a cheat sheet of how to use the different metrics and which one might be appropriate for what you are trying to understand.

Why Multiple Indexes?

No single metric can capture the full range of price changes, consumer habits, and economic shifts. CPI is best for consistent, out-of-pocket price trends. PCE adapts to the complexity of actual consumer behavior, including employer and government paid expenses. PPI shows upstream price pressures from Producers that may end up in Consumer prices via Cost Push inflation. GDP-related indexes help economists and forecasters look at the big picture to understand real Growth versus Inflation. Each is used for decisions that would be ill-served by a “one index fits all” approach.

Summary

Inflation, the terms, the metrics, and way it is discussed and used can be a lot to take in. Hopefully you have a better understanding of the metrics, and how do make sense of them. Knowing that what you feel and what is being reported in the news can and often are different and that is normal even if if it doesn’t make you feel like it represents you. Hopefully you have a better understanding and can recognize which metric is being cited, understanding how it is calculated, and if it is the best for your situation. You should now be able to read inflation news and be able to think critically and understand if it is accurately representing your current economic situation and the country as a whole.

Sources

1. U.S. Bureau of Labor Statistics
2. U.S. Bureau of Economic Analysis
3. Federal Reserve, St. Louis Fed

References

1. https://ofm.wa.gov/washington-data-research/economy-and-labor-force/inflation
2. https://bipartisanpolicy.org/explainer/inflation-measurement/
3. https://www.bea.gov/resources/learning-center/what-to-know-prices-inflation
4. https://www.stlouisfed.org/publications/regional-economist/2022/sep/making-sense-inflation-measures
5. https://www.federalreserve.gov/faqs/economy_14419.htm
6. https://www.brookings.edu/articles/how-does-the-government-measure-inflation/
7. https://econofact.org/what-different-measures-of-inflation-tell-us
8. https://www.bls.gov/opub/hom/cpi/concepts.htm