How We Feel Inflation vs. How We Measure It

I'm David Brunkhatchey, about two-thirds of Americans say their expenses have risen in

the past year, but only about a quarter say their income is up.

This is drawn from a new Associated Press poll, so it's how inflation feels to us.

How the data scientists measure inflation comes later this morning when the government

releases personal consumption expenditures for September.

The guardians of interest rates at the Fed prefer this PCE index to the other one that

gets so many headlines, the Consumer Price Index, Marketplace's Nancy Marshall Genser explains

why.

The Consumer Price Index, the CPI, and the Personal Consumption Expenditures Price Index

or PCE, both measure the cost of a basket of goods, but the baskets aren't the same.

Housing is a much bigger part of the CPI basket, and there's been a huge increase in housing

costs nudging the CPI higher.

The PCE is pushed lower because it accounts for consumer substitutions.

For example, if beef prices spike, they switch to chicken.

Claudius Sam is a former Federal Reserve economist and founder of Sam Consulting.

That's going to mean that the shopping cart costs less.

Sam says there's another difference.

The CPI measures what we consumers spend.

The PCE also looks at what businesses charge for consumer products and services.

Sam says, think about health care.

There's your out-of-pocket copay, which the CPI measures.

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