Unlike esoteric economic concepts like “quantitative easing” and “yield curves,” inflation is something we all experience firsthand. Skyrocketing egg prices. Ever-escalating electricity and natural gas bills. Housing prices seemingly out of reach for anyone save the “one-percenters.”
So, when we read reports that claim that inflation is easing, it often doesn’t feel like that way. Especially when we look at our shopping receipts or our monthly credit card bills.
But just what is inflation, really? How is it calculated? And why do there seem to be several inflation reports every month? Isn’t there one inflation rate that tells the whole story?
The answer to the last question is basically, “No.” In its infinite wisdom, the U.S. government has created several different inflation measures. Here’s a quick guide to the ones you’re most likely to see quoted in the news.
The CPI
When economists and the media talk about changes in inflation, they’re most often citing the latest figures for subsets of the Consumer Price Index (CPI), which measures how much people pay for various goods and services every month. CPI data is compiled and published by the Bureau of Labor Statistics (BLS).
To calculate CPI, the BLS measures ongoing changes in prices for a predetermined basket of goods and services comprising more than 200 categories.
These categories include, but are not limited to: food, mortgage payments, rent, clothes, transportation, new and used vehicle prices, medical care, prescription drugs, entertainment, education and communication costs.
The BLS calculates various inflation rates by comparing the total cost of items in the bucket to the costs of those same items at some time in the past, often year over year.
So, for example, if the inflation rate for May 2025 is 2.5%, this could mean that the aggregated “price” for the basket rose by this amount compared to its price in May 2024.
But, this being the U.S. government, there’s naturally no single inflation rate. Based on the same basket, the BLS calculates a variety of different inflation measures, the majority of which are only of interest to economists and policy wonks.
So, we’ll focus on a few inflation metrics you’re most likely to see in the headlines.
The CPI-I: The “headline inflation” measure
Speaking of headlines, the most well-known CPI metric is the Consumer Price Index for All Urban Consumers (CPI-I), which represents pricing changes impacting 93% of the U.S. population. When you hear the term “headline inflation,” it’s generally the CPI-I rate they’re referring to.
CPI-I is the most accurate reading of how inflation might impact you on an everyday basis, since it covers the costs of nearly everything you spend money on each month.
However, some economists and policymakers prefer a subset of the CPI-I, known as “core inflation.”
Core inflation: Hold the food and energy
Core inflation is simply the CPI-I stripped of food and energy costs.
Advocates believe it’s a better measure of long-term inflation trends because it omits the disruptive “noise” generated by sudden swings in the prices of things like eggs, gasoline and home heating fuel.
However, the removal of these commodities from core inflation doesn’t necessarily eliminate their inflationary impact. For example, spikes in fuel prices may result in higher airline fares or raise shipping costs and Uber rates.
In any case, despite their differences, both headline and core inflation tend to move in lockstep over time. The main difference is that headline inflation usually experiences wider spikes and troughs, as shown in the chart below.
Source: US Inflation Calculator
As we can see, headline inflation (“all items”) was significantly higher than core inflation in 2021 and 2022, reflecting skyrocketing energy and food prices resulting from lingering post-pandemic global supply chain issues and the impact of sanctions on Russian energy exports.
CPI-W: The metric that determines your Social Security check
Another subset of the CPI is of particular interest to retirees and taxpayers: The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Based on the same CPI bucket as CPI-I, CPI-W calculates the impact of inflation on the 29% of American households populated by clerical and hourly wage workers.
Why is CPI-W important? Because it’s used to determine the annual Social Security Cost of Living Adjustment (COLA) and changes in federal income tax brackets.
PPI: Measuring the cost to make stuff
A less commonly cited inflation indicator is the Producer Price Index (PPI). The benchmark, also calculated by the BLS, measures the change in prices manufacturers, farms, energy companies and other businesses charge for the raw materials, goods and services they produce, based on voluntary quotes from more than 25,000 producers.
PPI is essentially a measure of changes in wholesale prices. Some economists believe that it’s a more accurate measure of inflation and economic output because it’s not impacted by short-term purchasing trends among consumers.
For example, PPI tracks the price farmers charge for eggs they sell to supermarket chains. But it doesn’t track how much people pay for a carton at their local store. If the huge demand for eggs allows the store to mark them up by 500%, that price will be reflected in CPI-I, but not in PPI.
Which is the one true inflation measure?
None of them, really. Because in their own ways, CPI-I, core inflation, CPI-W, PPI and other more obscure metrics help to paint a broader picture of current and long-term inflation trends among producers and the consumers who purchase their goods and services.
Why is it important to keep track of inflation?
Beyond indicating how much your next carton of eggs will cost, inflation measures may help foretell future economic conditions.
Falling inflation rates coupled with a softer job market will almost certainly result in the Federal Reserve lowering interest rates, which will ease borrowing costs for consumers and businesses, which could spur economic growth.
Higher inflation resulting from tariffs and global trade wars could stifle economic growth and lead to accelerated layoffs and a recession.
But, to paraphrase the axiom popularized by the late Speaker of the House Tip O’Neill, "All inflation is local." Reports of national inflation trends don't mean all that much if you're paying more every time you go to the store or fill your gas tank.
This article was authored by David Jaeger and Jeffrey Briskin. David is a financial advisor with Canby Financial Advisors, a SEC-registered investment adviser. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or training. David can be reached at 508.598.1082 or djaeger@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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