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By Peter Coy
Opinion Writer
As a kid I was dazzled that Howard Johnson’s had 28 flavors of ice cream, including lemon stick and strawberry ripple. As an adult I am equally impressed by the number of flavors of inflation. There are dozens of ways to measure price changes, each serving a different purpose.
The big news on Thursday was an increase in one particular flavor of inflation, the price index for core services excluding housing. It rose 0.6 percent in January from December. If it increased that much every month — which it definitely will not — it would rise more than 7 percent in a year, which would be very bad.
I’ll say more about what that measure of inflation (known as “supercore”) is and why it matters, but for now I want to talk about how the U.S. government calculates inflation in the first place and why economists, including those at the Federal Reserve, care about some measures more than others.
All inflation rates are summaries. Calculated by either the Bureau of Labor Statistics, or B.L.S., (housed in the Labor Department) or the Bureau of Economic Analysis (housed in the Commerce Department), they’re based on the prices of items people spend money on, weighted by how much of each item they buy. In other words, the inflation you experience depends on the things you buy.
Since no two families buy exactly the same things over the course of a year, no two families will have the same personal inflation rate, as Steve Reed, an economist at the B.L.S., observed in a video primer.
The most familiar measure of inflation is the Consumer Price Index, which is prepared by the B.L.S. and tracks the cost of buying a fixed basket of goods and services. But even that seemingly well-known metric comes in multiple varieties. The one that typically gets quoted is C.P.I.-U, where the “U” stands for all urban consumers. It covers about 93 percent of the population, according to the B.L.S. Its less-known partner is C.P.I.-W, with the “W” referring to urban wage earners and clerical workers. That’s a subset that accounts for about 29 percent of the population.
Many big metro areas get their own indexes, but there’s no C.P.I.-R for rural America. That’s because the government sends people into stores to collect price data, and doing so in the far-flung stores of rural America every month would be prohibitively expensive.
The B.L.S. also issues a lot of indexes for special populations on an experimental basis, which aren’t as reliable as the two headline ones, C.P.I.-U and C.P.I.-W. For example, there’s an index for people aged 62 and over, and versions of C.P.I.-U for each of the five quintiles of the population by income.
Other B.L.S. flavors distinguish themselves by their method of preparation. There’s a European-style accounting of inflation called the Harmonized Index of Consumer Prices that’s designed to be comparable with other nations’ inflation rates, mainly ones in Europe. And there’s a C-C.P.I.-U that uses what economists call chain weighting, which more regularly updates how consumers change what they purchase in response to fluctuating prices (more of the cheap stuff, less of the expensive).
The Bureau of Economic Analysis, or B.E.A., which prepares estimates of the gross domestic product, has a different passel of price indexes, which separate changes in the prices of goods and services from changes in the amount that is sold. The purpose of these indexes is to help determine to what extent a spike in the dollar value of economic output is real and how much comes from price increases.
The B.E.A. has a price index for overall gross domestic product, but the indexes that most people focus on are the ones on personal consumption expenditures, which account for two-thirds of gross domestic product.
The B.E.A.’s price index for personal consumption expenditures, or P.C.E., is analogous to the Consumer Price Index, although it tends to run slightly lower because of differences in how it’s calculated and what it covers. It updates what people buy more frequently than the C.P.I. does. It also gives much less weight to housing costs than the C.P.I. does, but more weight to health-care costs, because it includes expenses paid for by employer health insurance and Medicare, not just out-of-pocket ones.
For economy watchers, the biggest reason to focus on the P.C.E. price index — that’s the one that came out Thursday — is that it’s the measure the Federal Reserve uses to determine whether it’s reaching its target of 2 percent inflation. If the Fed gains confidence that it’s on track to get inflation back down to 2 percent, it will start to cut interest rates, which will be good for economic growth, corporate profits and stock prices.
The P.C.E. price index bounces around a lot, making it hard to extract the inflation signal from the noise. The Federal Reserve Bank of Atlanta has a dashboard of nine custom measures of inflation that are intended to reveal the underlying trend. They include the Atlanta Fed’s own “sticky” C.P.I., the Cleveland Fed’s median C.P.I., the Dallas Fed’s trimmed-mean P.C.E. price index and the San Francisco Fed’s cyclical core P.C.E. price index. So many flavors.
Another way Fed economists try to filter out the noise in the data is to focus on “core” inflation measures, which are those that exclude food and energy. Whenever I write about core inflation, I get mail claiming that it’s a trick to minimize inflation. I love a good conspiracy theory, but that’s not what’s going on. In fact, when food and energy prices are falling, core inflation is higher than the headline number that includes everything. While food and energy should be included when looking at long-term price trends, the reason to leave them out when looking at short-term trends is that they fluctuate so much that they can obscure the underlying dynamics of inflation in the economy.
Lately the Fed has gotten even core-ier. Jerome Powell, the chair of the Fed, likes to monitor the P.C.E. price index for services, on the logic that goods prices reflect global market forces (such as prices of imports from China), while services prices more closely reflect domestic supply and demand. Within that, Powell likes to look at core services, excluding energy services such as electricity and gas. And within core services, he likes to further exclude housing services, since housing has its own wacky price dynamics. (Housing is considered a service even for homeowners, since the government estimates what homeowners would have to pay to live in their homes if they were renters.)
This drastically pared-down inflation measure is what economists call “supercore”: the P.C.E. price index for services excluding energy and housing. It’s not even a number the government reports monthly; economists have to derive it from the data that the B.E.A. does release in its report on personal income and outlays, such as the one that came out on Thursday. That’s the number that went up 0.6 percent in January from December. (I told you I’d explain it.)
The supercore covers a wide range of services, including health care, education and hospitality. The major factor in the cost of those services is wages, so the Fed sees the supercore as a window into what’s going on with the cost of labor. In a 2022 speech, Powell said that the supercore — a term he didn’t use at the time — “may be the most important category for understanding the future evolution of core inflation.”
So how worried should we be about the January rise in supercore? Not so worried, several economists wrote after the numbers came out. The 0.6 percent increase was “principally due to outsized gains in portfolio management prices, which reflects the recent strong performance of the stock market, and medical care services, which we think was an anomaly,” Paul Ashworth, the chief North America economist for Capital Economics, wrote in a client note.
Ian Shepherdson, the chairman and chief economist of Pantheon Macroeconomics, told me he’s also not too concerned. “The trend in those numbers has been slowing since the middle of 2022,” he said. “I’m not thrilled, but one bad number doesn’t change the trend.”
Shepherdson added that if the Fed really wants to know what’s happening to labor costs, there are more straightforward ways, such as consulting the Employment Cost Index, which measures the hourly cost to employers of labor and includes both pay and benefits.
Maybe so. But as long as Jay Powell and his fellow rate-setters focus on supercore, everyone trying to predict the Fed’s next move will do the same.
Regarding the proposed Kroger-Albertsons merger: Please consider rural America, where a large town of 20,000 people or so might have a City Market and a Safeway. No Walmart, no Sam’s and no Costco. If this merger is approved, people in small towns, particularly in the big square states, are screwed.
Ellen Miller
Grand Junction, Colo.
If the merger isn’t approved, I frankly believe that Safeway, which is owned by Albertsons, will have to find another merger of some sort. Otherwise, it will close its doors, and the workers will have to find new jobs. Sometimes, the only way to survive is to merge.
Norman Reinhardt
Denver
If this merger goes through then there is no such thing as antitrust. This merger has no benefit to the public. To say that a company with over 1,000 stores can’t compete is absurd. In my area there are chains with less than 100 stores that successfully compete and sometimes beat Walmart.
William Moran
Mendham, N.J.
In your newsletter about the decline in the personal saving rate, you wrote, “The rise in the stock market and housing market has made people feel richer, which has prompted them to open their wallets.” My guess is that people who are feeling richer because of their equity in equities and in real estate are spending much more than they should, thus not saving. Their spending is not reducing the inflationary goosing of prices, either.
Budd Whitebook
Washington, D.C.
“No doubt the same may be said of all professions. They are all conspiracies against the laity.”
— George Bernard Shaw, “The Doctor’s Dilemma: Preface on Doctors” (1911)
Peter Coy has covered business for more than 40 years. Email him at coy-newsletter@nytimes.com or follow him on Twitter. @petercoy
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