Inflation's Indices

By Jonathan Higuera
March 23, 2008 06:46 PM

With the Fed pumping money into the economy, analysts and market watchers around the globe are closely monitoring the inflationary impact. For business journalists, however, inflation-related stories are already a big part of our daily work as we chronicle rising prices for consumer goods including food and gas.

Still, it's never too late for a refresher on some of the ins and outs of writing inflation stories. There are common traps to avoid and simple facts to acknowledge.

With the help of economist Tracy Clark from Arizona State University, here are a few reminders.

1. Avoid using the terms Consumer Price Index and cost-of-living index interchangeably. The CPI measures the average price change in consumer goods. Cost-of-living indices most often refer to the costs to live in one city compared with another.

2. Keep CPI numbers in context. If prices are high but don't show much change from the last measurement period, inflation is presumed to be low or non-existent. But that doesn't mean people are not struggling to keep up. The CPI only measures price change over a set period.

3. Don't assume the CPI is a spot-on picture of what's happening out there. Some problematic areas are housing and medical costs. The housing figure can only be estimated because there is no way to directly measure housing costs for people who own instead of rent. Medical costs are a challenge because the published CPI likely under weights spending for senior citizens while it over weights spending for twenty-somethings.

4. Pay attention to the index's base year. This is especially important when you are putting something in real or inflation-adjusted terms. If the cost of something was $10 in today's dollars and the base year of the index was 2000 with an index value this month of 124.3, the inflation-adjusted cost in 2000 dollars would be 10 divided by 1.243 and equal $8.05.

5. Focus on the index that is right for your audience. The CPI for All Urban Consumers provides the broadest measure of the various CPI indexes, and therefore it is the most commonly cited. But, if you are reporting in a rural area, it might be more relevant to use a different index.

6. Know what each index can best tell you about inflation. For example, you may want to factor out housing and gas prices by using the Core Inflation Index, which doesn't include those two categories. One reason: it can tell you if high food and gas prices are seeping into other goods.

7. Be aware of other indices. Some economists are convinced the Federal Reserve pays more attention to the Personal Consumption Expenditure series than CPI numbers. The PCE, put out by the Bureau of Economic Analysis, tracks a broader array of personal consumption purchases from individuals and businesses, but it doesn't offer price information for individual cities. Other indices to watch include the Producer Price Index, which measures inflation at earlier stages of production and marketing, the Employment Cost Index, the BLS International Price Program for imports and exports, and the Gross Domestic Products Deflator.

For more insight into the Consumer Price Index, visit this FAQ from the US Department of Labor.

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism