As Milton Friedman noted, “inflation is always and everywhere a monetary phenomenon.” Inflation is simply an increase in the money supply. It is NOT an increase in prices. The rise in the overall price level is the RESULT of inflation, and is measured various ways.
Consumer Price Index
There are several different measures of inflation, but the most commonly used measure is the Consumer Price Index (CPI) which, as the name implies, measures inflation at the consumer level. Because the prices of both food and energy are volatile when compared to other components of the index, policy makers also look at “Core-CPI” which is the CPI less food and energy. The graph below shows the most recent annual growth for both CPI and Core-CPI.
While core-CPI removes food prices because they are considered “volatile” it is interesting to note what they have been doing recently.
Personal Consumption Expenditures Index
Another commonly used measure of inflation is the Personal Consumption Expenditures (PCE) index which also measures price changes in consumer goods and services exchanged in the U.S. economy. The PCE is important because it is considered to be the Federal Reserve’s preferred inflation gauge when evaluating the economy and how inflation is running compared to their policy target. The graph below shows both PCE and Core-PCE (i.e., PCE excluding food and energy).
Producer Price Index
The Producer Price Index (PPI) measures inflation at the producer level, and it can be a leading indicator of how prices will move at the consumer level in the future. The graph below shows the most recent annual growth for the PPI as well as the PPI for goods and the PPI for services.
GDP Implicit Price Deflator
The final measure of inflation presented here is the Gross Domestic Product (GDP) Implicit Price Deflator. The GDP price deflator measures the changes in prices for all the goods and services produced in an economy. It is a more comprehensive inflation measure than the CPI presented above because it isn’t based on a fixed basket of goods. Because the CPI is based on a basket of goods, it is static and can miss changes in prices of goods outside of it. By tracking the prices paid by businesses, the government, and consumers on all goods, the GDP price deflator automatically covers changes in consumption patterns or the introduction of new goods and services, and as such, is a better indicator of inflation within the economy. Simply put, the GDP price deflator shows how much a change in GDP relies on changes in the price level. The graph below shows the most recent annual growth for GDP Implicit Price Deflator.