How Is Inflation Measured?


Quick Answer

Inflation is measured by tracking numerous price indices and surveys that indicate how prices have changed for goods and services over time. Every month in the United States, the Bureau of Labor Statistics gathers data on prices of goods, and these prices are averaged to determine inflation throughout the year.

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Full Answer

Central banks often focus on tracking core inflation, which is inflation measured using basic price indices that exclude food and energy. These items are left out because their prices change too often. Measures of core inflation include the Consumer Price Index, or CPI, excluding eight components, median CPI and trimmed mean. By using these measures to exclude certain statistical numbers, such as large monthly price changes or small percent changes in price, policymakers are able to assess inflation trends.

The CPI and the Personal Consumption Expenditures index, or PCE, also track the average prices of goods. The CPI contains eight components that reflect what the average family purchases to obtain a minimum standard of living in the United States. Comparing the monthly or yearly numbers from these indices offers one measure of inflation, but these statistics do not take into account the consumer's ability to choose to purchase an inexpensive product because it is affordable. Instead, some indices track the prices that producers get for the goods they provide, or instead track labor costs. The Federal Reserve measures inflation using numbers that are averaged over long periods of time.

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