Why Measuring Inflation Is Such a Tricky Business: Q&A

For years after the 2008 financial crisis, politicians and economists parsed every blip in unemployment statistics, searching for signs of full recovery. Now that global unemployment has fallen, inflation has become the hottest indicator. Bond investors pick through the data for trends that could jolt the market even as U.S., European and Asian policy makers puzzle over why the readings have remained so low, as they were again in July. And inflation measures come in many flavors -- central bankers like to sample them all. That’s why it’s crucial that economy-watchers understand how the various gauges are compiled and used.

They measure different things. Let’s start with the U.S. Federal Reserve’s go-to numbers. The Fed officially favors a gauge of personal consumption expenditures reported by the Commerce Department. PCE tracks things that are consumed by Americans, including those they don’t directly pay for, like Medicare-funded health care. The Consumer Price Index -- a separate Labor Department measure -- tracks the prices of goods and services bought by people living in urban areas. Fed watchers still follow CPI closely, because it comes out earlier and it’s fundamentally important to the PCE. About 70 percent of the item categories included in Commerce’s PCE gauge are price-adjusted using Labor’s CPI data. (For the real wonks out there, Commerce reconciles the two gauges each month.)