Everyone is worried aboutxa0inflation. Here's why it's tracked two different ways

Inflation and the US Election #

Inflation is a key concern leading up to the November election. However, it is not rising as quickly as President Joe Biden would hope. The Federal Reserve has a target of 2% inflation, but the extent to which we are close to this target depends on the metric used.

The Personal Consumption Expenditures (PCE) price index, which is the Federal Reserve’s preferred gauge of inflation, is almost at the 2% target. The latest reading shows prices increasing at a 2.4% annual rate. On the other hand, the latest Consumer Price Index (CPI) data indicates a 3.2% increase in prices over the past 12 months.

The difference between these two gauges lies in what they track. CPI focuses on prices paid by consumers, while PCE takes into account prices paid by the government, nonprofit organizations, and consumers from across the country. One significant factor contributing to the discrepancy is that PCE gives more weight to spending on healthcare services, including spending by Medicare and health insurance companies. In contrast, the CPI places more emphasis on the housing sector, which can have a significant impact on the overall index.

The weights for each item in the CPI index are updated annually based on consumer expenditure surveys. In the past month, the 4.5% increase in shelter prices contributed to a significant portion of the overall rise in inflation. In comparison, housing has a more limited impact on PCE inflation measurement.

Both CPI and PCE use a metric called owners’ equivalent rent (OER) to measure housing inflation. However, OER does not consider the rates offered on new leases, which can take months to reflect in the indexes. Another issue with using OER is that it mainly affects renters, while most homeowners with mortgages have not experienced changes in their monthly housing payments.

As the election approaches, monitoring and understanding these inflation measures will be crucial for policymakers and voters alike.