The many limits of measuring inflation

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Inflation is improving.

At least, it improved in August. If you measure things a certain way.

Friday morning saw the latest release of the Fed’s preferred inflation metric, the Personal Consumption Expenditures price index, which marked the slowest increase in inflation — if you strip out volatile food and energy — since 2020.

That’s obviously a huge caveat, as these volatile but necessary costs make up a significant portion of many household incomes.?

These days with spiking oil and gas prices, these “core” numbers that exclude food and energy are especially useful to an anxious Fed that’s looking for evidence its policies are functioning.?

Both you and your car need energy at a fairly fixed rate, and this is not the economic fire the Fed is trying to douse as it keeps rates high. It’s simply noise.?

Noise, however, that Fed Chair Jay Powell is very aware the consumer has to pay for. And as our chart of the week shows, the difference is starker than it has been — which may also contribute to the difference between sentiment and progress I wrote about last week. As one PCE rises, core PCE falls. (We ran a similar chart for PCI inflation earlier this month and discussed the merits of both.)

But lower core numbers, welcomed by investors Friday at the market open, or even headline numbers, aren't necessarily what the Fed needs to look at. As my colleague Hamza Shaban wrote earlier this week, Powell himself admitted that looking at inflation metrics in general has significant limitations.

To start with, August? That feels like years ago. I’m currently wearing two sweatshirts and the tree out my window is fire-engine red.?

Such is the thankless challenge of the central bank. It’s why Powell added, as Hamza observed, the Fed is looking at other economic metrics to figure out what the economy is doing. Because it’s not where inflation was in August that’s important. It’s where it is now, and even more importantly, where it is next month and next year.

— Ethan Wolff-Mann, Senior Editor