Two Measures Of Inflation: CPI And The PCE Price Index And Fed Policy
Doug Short | Sep 19, 2013 02:57AM ET
: I've updated the accompanying charts with yesterday's Consumer Price Index data from the Bureau of Labor Statistics. The annualized rate of change is calculated to two decimal places for more precision in the side-by-side comparison with the PCE Price Index
The BLS's Consumer Price Index for August shows core inflation below the Federal Reserve's 2% long-term target range at 1.76%. The Core PCE price index, at the end of last month, is significantly lower at 1.20%. The Fed is on record as preferring Core PCE as its inflation gauge.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. [Energy Information Administration . The price volatility of gasoline in recent years have been quite dramatic.
I'll update these charts shortly after the next PCE report is released.
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