The Inflation Equations: Understanding The Differences Between Three Key Measurements

The problem with inflation is that it needs to go up, but not too much, and understanding whether we’re on target or not depends on which numbers you’re looking at. Today, we have a new round of inflation statistics: the Consumer Price Index for June shows that prices are down 0.1% from May, for a yearly increase of 3%. 

We’ve moved away from the sky-high inflation that peaked in the summer of 2022. So what can the CPI tell us? How is that different from other measures of inflation? And what does that mean for the future of work? 

Three Key Stats

Consumer Price Index

Every month, the Bureau of Labor Statistics (BLS) surveys businesses and landlords to collect a “basket” of about 94,000 prices and 8,000 rent quotes, then calculates how that basket compares to the previous month.

This is the big one: CPI is sometimes referred to the “headline” inflation rate, and it’s the basis for other calculations like Social Security payments or the Census Bureau’s poverty threshold, because those prices provide a rough estimate of the general cost of living. The BLS also releases a “core” CPI every month that includes all prices except food and energy (like gasoline), because those prices change more frequently than, say, rent. Economists and policymakers will often refer to Core CPI instead of the overall number because it lacks the same volatility.

Personal Consumption Expenditures (PCE) Price Index

The PCE Price Index differs from the CPI in a few key ways: first, it’s collected by the Bureau of Economic Analysis (instead of the BLS) and it’s one component of a bigger report—hence the need to call it the “PCE Price Index,” because the PCE itself is a bigger and broader report. The Federal Reserve likes this. As of 2012, the central bank considers the PCE its primary price index when thinking about how to adjust monetary policy by raising or lowering interest rates. 

More importantly, the PCE index adjusts for consumer behavior, so while the CPI measures the same basket of goods and services every month, the PCE index adapts to how consumers are actually spending their money, which could include substituting cheaper goods for more expensive.The PCE release covering May came out June 28, and showed little change compared to the month before, and is up 2.4% compared to May 2023. This is pretty common—CPI usually runs a little higher than PCE because of the way they weight different factors like housing. 

Producer Price Index (PPI)

The third main measure of inflation takes us back to the BLS. While the CPI measures the prices consumers are paying, the PPI measures the prices of what producers buy before converting them into goods and services. This means it often functions as a leading indicator of inflation relative to the other consumption measures—all else being equal, if a firm’s costs go up on the front end, they’ll likely raise costs on the back end, and vice versa. In May, PPI was down 0.2% month-over-month and up 2.2% year-over-year. 

Inflation’s Impact

Nothing in the economy happens in a vacuum, so inflation and the labor market go hand-in-hand. When prices rise, workers often seek higher wages to maintain their purchasing power. This can lead to what economists call a "wage-price spiral," where higher wages lead to higher prices, which in turn lead to demands for even higher wages.

In recent years, we've seen this dynamic play out. As inflation spiked in 2021 and 2022, many workers received substantial pay increases, as employers recalibrated their benchmarking to accommodate both high prices and a tight labor market. 

Employers, on the other hand, must balance the need to retain talent with the pressure to maintain profit margins in the face of rising costs. This balancing act can influence hiring decisions, potentially slowing job growth if inflation remains persistently high, and requires paying greater attention to how salary trends are playing out in industries you’re hiring in.

As the Federal Reserve has raised interest rates to fight inflation, the far-reaching implications of that policy also reach the labor market. The increasingly high cost of mortgages has meant workers are less likely to move across the country for jobs, making it all the more important to make intelligent talent pipeline decisions, especially in recruiting from your local workforce, and raising the stakes to choose business locations well. 

Connecting The Dots

Knowing the CPI is up 3% on the year is important. It’s a key baseline for understanding inflation as a whole and the ripple effects that creates. But we also need to remember that no single data point tells the whole story. In between the nuances of consumer vs. producer spending or the differences between what businesses charge and how people spend their money, no single measurement captures the whole—and the best approach is to take in as much data as possible and make decisions based on the connections between them. 

Thanks for reading On The Job. Be sure to catch up on our past issues (including "A Skills Approach For The Rest Of Us" “What Happens When AI Job Postings Go Down?” and “The Future Of The Future Of Work”), and you can also subscribe here. We’ll see you next time.