Inflation Dictionary Your Guide to the Jargon

Inflation Dictionary   Your Guide to the Jargon

Here's what experts mean when talking about ‘CPI’ and 'soft landing'

By Diccon Hyatt and Medora Lee  Updated on June 10, 2022

Fact checked by Julianne Slovak

Higher and higher inflation may seem relentless, but what exactly is driving it and what can be done? Government officials and the media are abuzz with talk of things like core inflation, supply chain problems, and interest rate hikes, but these terms can be opaque, to say the least.

As prices rise faster than they have since 1981, here’s how to translate the jargon.

Inflation

Inflation is a sustained increase in the average price level of goods and services. While prices of individual products—gasoline or steak, for example—can go up or down, that doesn’t necessarily mean there’s inflation, because inflation is a broad increase in prices.

The speed at which prices increase is called the inflation rate, and that accelerated to 8.6% in May from 8.3% in April, according to the latest reading of one widely used measurement, the Consumer Price Index (see definition below).1 In other words, overall, prices in May were 8.6% higher than they were in May 2021. For context, the inflation rate has stayed around or below 3% most years since the early 1990s, and the last time it was this high was all the way back in 1981.

Because prices are rising so much faster than usual, the big question is how long it will last and what can and should be done about it.

Inflation happens when “too much money chases too few goods,” according to an old saying in economics. There’s broad debate over exactly what is causing the current inflation trend.

But some economists argue the pandemic’s shutdowns and labor shortages have caused difficulties in production and transportation that have given us the “too few goods” part of the equation, while government stimulus measures to combat the pandemic’s economic downturn have provided the “too much money” element.

To that point, the government, via the Federal Reserve, has pulled back its support to curtail the “too much money” factor, raising the cost of borrowing by increasing its benchmark interest rate. But raising the rate (see below) risks higher unemployment and hitting the brakes on economic growth, so it’s not always an easy choice. Making matters worse is the war in Ukraine, which sent the price of oil and other commodities higher amid sanctions against Russia and other supply disruptions in the region.

CPI and PCE

The Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index are both government measures of consumer prices. The change in them, more often than not measured year-over-year, is inflation when it’s going up, and deflation when it’s going down.

With each index, there is a “headline” inflation rate as well as a “core” inflation rate (see definition below) that strips out prices from the volatile food and energy sectors.2 The details of how they measure price changes and what they measure are different, and explain why CPI tends to reflect more inflation than PCE.3

CPI, released by the Bureau of Labor Statistics, measures how much urban consumers pay for a basket of goods and services based on household surveys. The basket is static, measuring the price changes of the same basket each month, and only accounts for out-of-pocket expenses, so items that are not directly paid for—like Medicare or Medicaid—aren’t counted.

In contrast, the Bureau of Economic Analysis’s PCE index reflects the prices of goods and services businesses are selling. It includes those items not directly paid for by consumers, like medical care paid for by employer-provided insurance, and accounts for changing consumer choices, making the basket more variable. For example, if bread gets too expensive and people stop buying it, the weighting of bread drops in the calculation.

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