inflation
What Is Inflation?
The inflation rate is the rate at which price levels move upward. An decrease in the inflation rate is known as disinflation, while a
negative inflation rate is known as deflation.
Conventional Measures
Typically, inflation is measured with two main indexes: the Personal Consumption Expenditures (PCE) index and the
Consumer Price Index (CPI). Using the Cleveland Fed's customizable inflation chart generator, you can create any inflation-
related graph necessary (or download the data and format it yourself):
The inflation rate is the rate at which price levels move upward. An decrease in the inflation rate is known as disinflation, while a
negative inflation rate is known as deflation.
Conventional Measures
Typically, inflation is measured with two main indexes: the Personal Consumption Expenditures (PCE) index and the
Consumer Price Index (CPI). Using the Cleveland Fed's customizable inflation chart generator, you can create any inflation-
related graph necessary (or download the data and format it yourself):
Factors Affecting Inflation
Note: This list is not comprehensive!
1. Wages/Input Costs
A classic relationship in economics, a change in wages can signify an increase of inflation. From this notion stems another important (and
hotly-contested) relationship: the Phillips Curve, an inverse tradeoff between inflation and unemployment.
2. Oil/Energy Prices
Because it's used as an input for almost all facets of economic production, a change in oil/energy prices can dramatically affect
price stability. One can find data on oil and commodity prices from the International Monetary Fund or through a number of oil-related
financial markets.
Despite the fact that many fluctuations in oil prices are seasonal and temporary, a drastic rise or decline in oil prices can affect not only
general measures of inflation, but also measures that exclude energy prices. For instance, low energy prices contributed to abnormally low inflation at the end of 2014, and extremely high prices in the early 1970s led to stagflation and, at the time, the worst recession since the
Great Depression.
4. Inflation Expectations
There are few more accurate predictors of future inflation--and nothing less crucial to include in a high-quality presentation about inflation--
than an analysis of inflation expectations. Be sure to include at least 2-3 of the following measures:
A. Market-Based Measures
The following expectations based off investors' hedging inflation risk. The Federal Reserve's breakeven inflation rates are calculated
based off the difference in maturity rates between treasury yields and Treasury Inflation-Protected Securities (TIPS). These measures
can vary in time to maturity and thus have different implications about inflation expectations:
B. Survey-Based Measures
For more information about expected future inflation, consult the following surveys:
Frequently Asked (Inflation-Related) Questions:
Q: What's the difference between CPI and PCE?
A: Mostly the way it's calculated. The PCE accounts for the changes in all consumer goods and services prices, while the CPI focuses on the
price of a "basket of goods" purchased by the average urban family. The Federal Reserve typically uses headline PCE to base its policy decisions because of its statistical basis. Note, however, that since most of the difference is rooted in theory and statistics, different economists will have different views on both measures--sometimes it's best to consult both measures.
Q: When is it useful to discuss core PCE/CPI?
A: It depends on current economic conditions. Both core CPI and core PCE measure inflation without taking into account typically volatile food and energy prices. Often this measure is more stable than headline measures, which keeps it relevant despite the significant share of consumers' budget spent in food and energy. Also, specific instances call for an examination of core versus headline inflation. If, for example, declining energy prices threaten below-target inflation threatening recession, or political instability in oil-producing countries threatens stagnation, it may be extremely useful to observe trends in core measures.
Q: Is inflation always bad for the economy?
A: Absolutely not! Most economists view a moderate level of inflation as a sign of economic growth. Remember the factors that drive inflation: pressure to increase prices and wages indicate strong product and labor markets, and often raise price levels as a side effect. In fact, the Federal Reserve targets 2% headline PCE inflation--a target which, in its view, creates the best balance between economic growth and price stability. The Fed is concerned with keeping inflation stable and anchored around its target. Extremely low, high, or volatile inflation creates uncertainty throughout the economy and goes against the Federal Reserve's dual mandate of maximum employment and price stability.
Q: Where can I find more information about inflation?
A: The Cleveland Fed's Inflation Central keeps updated information, including trends in current inflation. Additionally, the Beige Book
compiles information about many economic indicators, including inflation, and breaks them down by region.
Q: What's the difference between CPI and PCE?
A: Mostly the way it's calculated. The PCE accounts for the changes in all consumer goods and services prices, while the CPI focuses on the
price of a "basket of goods" purchased by the average urban family. The Federal Reserve typically uses headline PCE to base its policy decisions because of its statistical basis. Note, however, that since most of the difference is rooted in theory and statistics, different economists will have different views on both measures--sometimes it's best to consult both measures.
Q: When is it useful to discuss core PCE/CPI?
A: It depends on current economic conditions. Both core CPI and core PCE measure inflation without taking into account typically volatile food and energy prices. Often this measure is more stable than headline measures, which keeps it relevant despite the significant share of consumers' budget spent in food and energy. Also, specific instances call for an examination of core versus headline inflation. If, for example, declining energy prices threaten below-target inflation threatening recession, or political instability in oil-producing countries threatens stagnation, it may be extremely useful to observe trends in core measures.
Q: Is inflation always bad for the economy?
A: Absolutely not! Most economists view a moderate level of inflation as a sign of economic growth. Remember the factors that drive inflation: pressure to increase prices and wages indicate strong product and labor markets, and often raise price levels as a side effect. In fact, the Federal Reserve targets 2% headline PCE inflation--a target which, in its view, creates the best balance between economic growth and price stability. The Fed is concerned with keeping inflation stable and anchored around its target. Extremely low, high, or volatile inflation creates uncertainty throughout the economy and goes against the Federal Reserve's dual mandate of maximum employment and price stability.
Q: Where can I find more information about inflation?
A: The Cleveland Fed's Inflation Central keeps updated information, including trends in current inflation. Additionally, the Beige Book
compiles information about many economic indicators, including inflation, and breaks them down by region.