7.4: Measures of Inflation

Since inflation is simply the change in the price level of a good or service (usually expressed as a percentage), it is measured in many economic sectors.

Table 5

Market	Type of Inflation Measure/Indicator	measures . . .
Consumer	Consumer price index (CPI)	price changes of a fixed grouping of consumer goods and services.
	Personal consumption expenditure index (PCE index)	price changes in consumer goods and services. Unlike the CPI, which is a fixed grouping of goods, this indicator allows households to substitute alternative goods that are lower priced.
	GDP price deflator	price changes across all sectors of the economy, taking into account changes in prices for goods and services in the consumer, business, government, and trade markets. This is the broadest measure of inflation.
Producer	Producer price index (PPI)	price changes of goods (not services) needed for production.
Financial	Dow Jones Industrial Average (DJIA)	the price-weighted average of thirty leading industrial stocks traded on the New York Stock Exchange.
Housing	Median new home sales price	the median sales price of newly constructed homes. This measure doesn't include the price paid for existing homes.
Labor	Unit labor cost (ULC)	the cost of labor per unit of output.

Choosing among the many inflation measures can be difficult, and no single measure can be considered the U.S. "inflation" rate. While the CPI is undoubtedly the best known and most widely used inflation estimate, this statistic does not include capital goods or other items purchased by businesses. (We'll examine the CPI later in this chapter.) Such items are part of the PPI, but this price index does not include services, a major segment of the CPI. An even broader index, the GDP price deflator, covers virtually all goods and services sold in the economy, including those purchased by the government and foreigners, but it is published only four times a year and is frequently revised.

Deciding on the appropriate measure of inflation depends on many factors, such as

• market (Do you want to measure inflation for consumers, businesses, labor?)
• frequency (When and how often do you need this information?)
• coverage (Consumer goods only or the entire market?)
• time (Do you want to compare prices from a month-to-month or decade-to-decade basis?)

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