Econoday | Resource Center | Fed Watching Indicators

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Short Term Perspective
The PCE deflator incorporates most of the CPI components. Nonetheless, it shows less inflation than the CPI because it also takes into account the fact that consumers substitute lower priced goods for higher priced goods as relative prices change. For example, when the price of chicken falls relative to the price of beef, consumers will buy more chicken. Thus, their actual food costs probably didn't increase as much as indicated by the CPI, which measures a fixed basket of goods and services, and doesn't allow for substitutions. Higher energy costs boosted both the CPI and the PCE deflator several months between February and October. The gap between the two series remains wide, reflecting a shift in the composition of spending on goods and services relative to those goods and services measured by the fixed weight CPI.

Long Term Perspective
Inflation is always a key indicator among Fed officials. Although the CPI is the most common inflation measure, Fed chairman Alan Greenspan prefers the personal consumption expenditure (PCE) deflator. He believes the latter is more representative of changes in the actual cost-of-living. The discrepancy between the PCE deflator and the CPI widened throughout 2000 perhaps showing a greater shift in the composition of goods and services actually purchased by consumers (towards lower-priced commodities).

Alternative Inflation Measures • Gold Prices • Employment Cost Index • Civilian Unemployment Rate

Pool of Available Labor • Nonfarm Productivity • Treasury Yields • Stock Prices • Humphrey-Hawkins Actions