What Do Alternate Measures Say About Consumer Inflation, and Why?

What to make of the different measures of inflation being faced by consumers?

In Figure 1, I plot four measures: the standard CPI-U, the CPI research series, the chained CPI, and the personal consumption expenditure deflator.

Figure 1: 12 month inflation measured as CPI-U (blue), CPI research series (red), Chained CPI (green) and Personal Consumption Expenditure deflator (black), calculated as 12 month log difference. Source: BLS via FRED II, BLS CPI researchchained CPI, FRED II and author's calculations.

The first observation I will make is that all series are moving upward over the last few months, with the CPI-urban exhibiting the most rapid acceleration. The chain weighted CPI inflation rate is lower, and accelerates less rapidly. This makes sense, because -- once again -- the CPI uses fixed weights, now updated every two years, while the chained CPI changes weights continuously. [1] (If there were a Paasche CPI, it would be below the chained CPI.)

Second, the personal consumption expenditure deflator shows a pattern very similar to that of the chained CPI, despite the fact that what is measured, and at what prices, differs. Recall, the PCE deflator measures costs of consumer goods and services produced by suppliers, but not not necessarily that consumers face. Think medical care,for instance, where consumers do not face the full costs of the goods and services produced. In addition, the shares of each component differ between the PCE and CPI. These differences are summarized in these charts from a 2006 presentation by BEA's Brian Moyer.

Figure 2: slide from Moyer (2006).

Figure 3: slide from Moyer (2006).

For more on the CPI-U and PCE deflator, see this post from January, as well as this paper. It's useful to recall that since a lot of imputation has to be done for the prices used in the calculation of the PCE, the PCE is subject to potentially large revisions as more data comes in (see this cautionary note from Fernald and Wang).

What about core measures? Now, before everybody gets into a frenzy about how core measures are a conspiracy to confuse people, I think careful analysts should be interested in core measures to the extent that energy and food have historically been more variable than other components. Whether monetary authorities should target core versus complete, I leave to others to debate. But I don't think more information can be worse than less, when just looking at the data. Figure 4 depicts core CPI and core PCE over the last few years (for a longer tracking, see this post).

Figure 4: 12 month inflation measured as CPI-less food and energy (blue) and Personal Consumption Expenditure deflator less food and energy (red), calculated as 12 month log difference. Source: BLS via FRED II author's calculations.

To the extent that some observers are suspicious of how well the CPI measures reflect changes in the inflation rate over time due to methodological changes, one can focus on the BLS research series (which applies the current construction methods retrospectively to past data), or the PCE deflator, which has undergone fewer methodological changes that people seem to worry about. (Note: I do not discuss the "representativeness" of either index -- see this post on plutocratic vs. democratic CPIs for that issue.)

The bottom line I take from this: there's no doubt that inflation rates are rising. And the standard CPI is rising more than the chained CPI and the PCE deflator, in part because of its quasi-Laspeyres nature.

Comments

[ain't no fo...:]

"And the standard CPI is rising more than the chained CPI and the PCE deflator, in part because of its quasi-Laspeyres nature"

I'm not much on quasi-Laspeyres nature, but my gas bills are up 40% or so in the past year, my food bills about 10% (and that's before I measure the shrunken size of the containers that the food manufacturers are sneaking onto the shelves these days), my utility bills about 10%, my health insurance about 12%... so puhleeeeeese don't tell me about mister or misses Laspeyres and their problems.

2008 Aug 22 12:05 PM

[Jason Rines...:]

WPDragon, this is an investment community. If you wish to come to a website that represents one, it is innapropriate to disrespect an author whom is educating investor and consumers alike. Your pain points are duly noted. Almost all are feeling it. And your lifestyle being Laspeyres esque or not is not relevant. What is relevant to protect you and your family in the next few years is self-educating on whom this person was. Because understanding economics and micromanaging the pennies will make a difference between the food pantry and homless homeless shelter versus keeping your home warm and with the foods you like to eat.

Don't blame the next person if you wind up going from a poor financial disposition to a downright awful one if you fail to conduct research. Research in economics truly isn't rocket science to learn to connect the dots of how it directly effects your life, but it often requires a lot of extra time taking you away from menial, but pleasant entertainment. Take care and best wishes.

2008 Aug 22 06:44 PM

[mouse:]

Sorry, it is always perfectly acceptable to call hogwash what it really is. If you can't stand to see or hear such things, go watch Fox News. They will keep you happy and complacent.

2008 Aug 23 06:11 PM

[mouse:]

Either this guy doesn't know about the ridiculous changes that have been done to the CPI since 1980 to make the same raw numbers produce a lower number, or he thinks it's ok to take out housing costs, use "substitution" (dog food will be next instead of pork chops or hamburger), and subtract for "hedonics" (it has more features, so the cost really didn't go up). Hogwash is hogwash.

2008 Aug 23 06:20 PM

[Menzie Chinn:]

Dr. Waterbury:
Thank you for your thoughtful comments. I discussed these issues in these posts on Econbrowser:
www.econbrowser.com/ar...

www.econbrowser.com/ar...

2008 Aug 23 11:23 PM

[mouse:]

Menzie, I enjoyed reading the post on econbrowser above, but I still think you're too willing to attribute the inacurrate numbers in the CPI to incompetence or lack of resources. When it is politically helpful to the current administration (of either party) to have lower CPI and thus higher GDP numbers reported to show what a good job they're doing managing the economy, it is downright naive to assume that schemes to "tweak" the numbers will not be undertaken. It's more than a little bit suspicious that all the changes have resulted in lower CPI rates. If it waddles like a duck, and it quacks like a duck, it's probably a.............

2008 Aug 24 06:36 PM