Why Are There So Many Price Indexes?

Tuesday, October 14, 2014

Each issue of The Regional Economist, published by the Federal Reserve Bank of St. Louis, features the section “Ask an Economist,” in which one of the Bank’s economists answers a question. The answer below was provided by Vice President William Gavin.

Various measures of prices and inflation have been constructed for different purposes and, therefore, reflect differing emphases. For example, the consumer price index (CPI) was designed to adjust pensions for World War I veterans. It measures changes in prices for a fixed basket of goods that is intended to reflect the typical urban consumer. Although the market basket is periodically adjusted, the fixed shares make it possible to leave past data unrevised. These properties make the CPI useful for indexing items like Social Security payments, wage contracts and inflation-adjusted bonds.

The personal consumption expenditures price index (PCEPI) was designed to measure the real, inflation-adjusted consumption component in the National Income and Product Accounts. Therefore, the PCEPI is a more comprehensive measure than the CPI. The PCEPI also differs from the CPI by using expenditure shares that change over time as consumers adjust their purchases in response to relative price changes—buying more apples when orange prices rise, for example.

Other price indexes are designed to measure prices of specific economic activities. The producer price index (PPI) tracks the prices of materials as they move through the production process toward finished-good status. The import price index, as the name implies, measures changes in the prices of imported goods.

For both the CPI and PCEPI, it is common to consider “core” measures, for which the food and energy components are eliminated. Because these two components tend to be more volatile than others, their omission leaves a measure that is thought to more accurately reflect long-term trends in inflation. A similar motivation lies behind the construction of the “median” and “trimmed mean” measures of the CPI that are published by the Federal Reserve Bank of Cleveland.

The Federal Open Market Committee (FOMC) has, in recent years, cast its inflation forecasts in terms of the core PCEPI. On Nov. 14, 2007, Fed Chairman Ben Bernanke announced that the FOMC would begin making quarterly projections for headline PCEPI inflation (which includes food and energy—important items in the consumer’s budget) and for core inflation (because it is a better short-run indicator of where headline inflation is likely to end up in the long run).

Additional Resources

Posted In Output  |  Tagged bill gavincpipcepi
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.

Subscribe to
On the Economy

Get notified when new content is available on our On the Economy blog.

Email Alerts  |  RSS

About the Blog

The St. Louis Fed On the Economy blog features relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts.

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Contact Us

For media-related questions, email mediainquiries@stls.frb.org. For all other blog-related questions or comments, email on-the-economy@stls.frb.org.