What do different measures of inflation tell us?
What do different measures of inflation tell us?
According to the personal consumption expenditures index, prices rose 6.3% in May from last year. Another inflation index, the consumer price index, put that number at a much scarier 8.6%. So what are we supposed to believe? The scary number or the extra scary number?
These numbers measure different things. “The big differences are that CPI includes more housing and gasoline. Which, gasoline went way up in May and housing has been going up faster lately, and that’s more important in CPI,” said Joe Gagnon with the Peterson Institute.
The PCE, the less scary number, includes more health care costs, which haven’t been rising as much. But more important than which measure you look at is what these measures are doing over time.
If you look at yet another measure of inflation, the core PCE, which takes out energy and food, it’s been falling steadily — from 5.3% in February down to 4.7% in May.
Jim Paulsen, chief investment strategist at The Leuthold Group, said he finds that “really encouraging, to some degree.”
One thing that can really mess with what inflation is doing is what people think inflation will do, or what economists call “expectations.”
“The basic reason expectations is important is quite simple. It’s that inflation can be self-fulfilling,” said Laurence Ball, professor of economics at Johns Hopkins.
If people expect inflation in the long term, that can cause inflation. “If I’m a company deciding on my prices, if I think there’s gonna be inflation — so my costs go up — I will want to raise my prices along with that,” Ball said.
Consumer inflation expectations for the short term ticked up in May, while the long term ticked down. If part of our inflation journey is going be determined by our mindset … our collective mindset’s not very clear.
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