Lies, Damn Lies, and Government Statistics: Is Inflation Really Low?

Yesterday, the U.S. Bureau of Economic Analysis released its March inflation data using the Personal Consumption Expenditure (PCE) model.

The core inflation number came in at 1.6%, below the 1.7% expectation and below the Federal Reserve’s 2% inflation target.  According to this data, prices are rising moderately.  Or are they? 

The government also calculates inflation using the Consumer Price Index (CPI).  The latest CPI data, released in early March, shows inflation running at 2.0%. 

Those do not sound like big differences, but over time they become significant.  Consider this graph from our friends at the Federal Reserve.  CPI increased significantly more than PCE.  Based on recent data, that trend is continuing.  (If you are really bored, you can read the differences between PCE and CPI via the link below the chart.)

The Federal Reserve, which sets interest rate policy, has been on record as favoring PCE as its preferred inflation measure.  That’s why this distinction in inflation measures is important.  The Fed risks continuing its easy money policies based on data that understates inflation.  When the Fed finally recognizes inflation is here, it will be too late.  Assuming the China rebound is real, prepare to pay more for everything in the very near future.    

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