Odd Lots

What Really Goes Into the Fed's Favorite Measure of Inflation?

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Feb 29, 2024
Skanda Amarnath, executive director of Employ America, and Omair Sharif, founder of Inflation Insights, dive into the complexities of inflation measurement. They discuss why the Federal Reserve prefers the Personal Consumption Expenditure (PCE) index over the more commonly known Consumer Price Index (CPI). The episode explores how methodological differences can lead to varied inflation readings and the challenges economists face in gathering accurate consumer spending data. The conversation sheds light on the quirks of inflation metrics and their real-world implications.
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INSIGHT

Inflation Measurement

  • The Federal Reserve prefers the PCE index for measuring inflation, while many people use CPI.
  • PCE and CPI differ in scope, weightings, and calculation methods.
INSIGHT

PCE vs. CPI Scope

  • PCE covers a broader scope of the economy than CPI, including payments made by third parties.
  • CPI focuses primarily on consumers' out-of-pocket expenses.
INSIGHT

Fed's Shift to PCE

  • The Fed shifted its focus from CPI to PCE around the year 2000, partly due to Greenspan's emphasis on quality change and substitution bias.
  • CPI tends to have higher readings than PCE.
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