Understanding the Way the Fed Measures Inflation

The Federal Reserve has a goal of getting inflation down to 2%. But of course, there are a lot of different ways of measuring inflation. Many people know about the Consumer Price Index, and the various ways it can be sliced and diced. The Fed, however, focuses on a different index — Personal Consumption Expenditure — which differs from the CPI in a number of ways, both in terms of category weightings and methodological approaches. So why are there different measures of inflation? Why does the Fed prefer PCE? And how is PCE actually assembled? On this episode, we speak with Omair Sharif, founder and president of Inflation Insights, as well as Skanda Amarnath, executive director of Employ America. We explore these two different measures, the approaches for calculating them, and the weird quirks underneath the surface that makes them all so interesting and controversial. This transcript has been lightly edited for clarity.

Key insights from the pod:
The difference between CPI and PCE — 4:43
Why does the Fed focus on PCE? — 6:44
The wedge between CPI and PCE — 8:26
Why the difference between CPI and PCE matters — 13:17
How does the government measure basic prices? — 15:43
The deterioration of survey responses — 18:37
How the government deals with imputed prices — 20:33
Benchmark rates, banks and inflation — 21:54
The treatment of rent and shelter costs — 24:22
Relationship between goods and service prices — 27:56
Seasonality in inflation data — 31:54
Measuring insurance inflation — 35:34
Measuring airfare inflation — 39:02
January PCE predictions — 40:06