When the July inflation numbers came out last week, economists and federal policymakers cheered. Compared to June, overall consumer prices remained stable.
Compared to a year ago, however, prices have risen at a blistering 8.5%, conservative commentators have pointed out, complaining that focusing on the monthly inflation rate is dishonest.
What number should Americans be looking at? Experts say both, plus a bunch of other indicators if they want to get an idea of where prices are headed.
“I find the whole debate a bit silly,” said Alex Williams, research analyst at Employ America.
How to watch the CPI
The consumer price index, which measures a specific basket of goods and services, is not a precision instrument. It is an average that hides the big drops and the big rises of particular elements. In July, for example, rising housing and food prices were offset by falling energy prices.
The CPI also lacks detail on how prices change for people in different income brackets or demographic groups. (There are many ways to improve the CPI.)
What it can tell us about the economy is limited, so Williams suggests looking at other types of data or news that suggest where prices are going in conjunction with the monthly CPI.
For example, to put the monthly inflation numbers into context, Williams cross-references specific sectors of the index with what purchasing managers in those industries are saying, which sheds light on where prices might go next. ‘coming.
The annual rate of the CPI, on the other hand, reflects what happened 12 months before the most recent figure. This is why some economists suggest that the media is reporting the two numbers in the headlines when the two numbers are very different, confusing the average American.
Why do people have trouble understanding the CPI?
Much of the inflation confusion may be a generational issue, according to University of Michigan economics professor Justin Wolfers. Anyone under the age of 60 in the United States has not experienced inflation in their adult life, he said.
“Apart from the general confusion, there are ideologues who pick and choose and try to confuse people,” Wolfers said.
Wall Street economists mainly care about the monthly figure because they know what has happened with inflation in previous months, he added. Annual increases, meanwhile, are important for workers negotiating wages, so they can ask employers to adjust to the cost of living.
“Each issue is an answer to a question,” Wolfers said. “If what I’m trying to do is predict the future path of inflation, the so-called basic measures do a better job.” Core inflation excludes energy and food prices, which tend to rise and fall based on transient emissions.
Where does inflation go from here?
July could be exceptional in terms of inflation data. “I’m not crazy enough to say that just because headline inflation rose from zero last month, it will rise from zero again in any future period,” Wolfers said.
He expects prices to rise over the next few months, but not more than 1% from the previous month.
“Some months as low as a quarter and some months as low as three-quarters…somewhere in that range,” Wolfers said.