Understanding Inflation: More Than Just Rising Prices

By: Katie Klingensmith

There’s a lot of talk about inflation these days. At first glance, it seems simple – prices are going up. But inflation is more nuanced than that and understanding the different ways it is measured can help you make sense of the headlines and, more importantly, how it affects your own spending.

One of the most common terms you’ll hear is CPI, or the Consumer Price Index. This is published monthly by the Bureau of Labor Statistics and tracks the average change over time in the prices paid by urban consumers for a fixed “basket” of goods and services. That basket includes everything from food, housing and clothing to transportation, medical care and entertainment. In short, CPI is the government’s way of measuring what the typical consumer pays for everyday living. That doesn’t mean it’s your basket of goods, but it does reflect actual prices.

Often, you’ll also hear about “core CPI.” This measure excludes food and energy, two categories that tend to swing wildly because of weather, supply chain disruptions or geopolitical events. They are also the items that most consumers – probably you! – spend a lot on. But by leaving those out, core CPI gives a steadier picture of the underlying trend in prices. Policymakers and investors pay close attention to core CPI because it provides a better sense of whether inflation is becoming embedded in the economy (and our psychology!), rather than just reacting to a temporary spike in gas or grocery prices.

Another measure is the Producer Price Index, or PPI. Instead of looking at what consumers pay, the PPI tracks the prices that domestic producers receive for their goods. This is essentially inflation from the wholesale side of the economy. When producer prices rise, companies often pass those costs along to consumers, although sometimes with a lag or only in certain categories. That makes PPI an important leading indicator of where consumer prices might be headed.

The Federal Reserve has a different favorite number: PCE, short for the Personal Consumption Expenditures Price Index. This measure is calculated by the Bureau of Economic Analysis, and while it is similar to CPI, it has some key differences. PCE includes not only the things you pay for directly but also the goods and services purchased on your behalf, such as employer-paid health insurance or government programs like Medicare. It also adjusts more frequently for changes in consumer behavior, such as substituting chicken when beef prices spike. Because of this, PCE tends to be a little smoother and usually comes in lower than CPI. Since the early 2000s, the Federal Reserve has preferred PCE as its primary inflation gauge, because it provides a broader and more stable view of consumer spending trends.

There are lots of ways to measure inflation!

CPI, Core CPI, PPI, PCE – there are lots of different ways to measure prices, but what really matters are your own prices.

Source: Bloomberg; as of 8/31/2025

It’s also important to understand that inflation isn’t simply about prices going up once. If tariffs are imposed on imported goods, for example, that might make some items more expensive. But unless prices continue to rise month after month, that one-time jump isn’t inflation in the economic sense. Inflation is about a sustained and broad-based increase in prices across the economy. That’s why economists talk about inflation as an ongoing process, not just an isolated price hike. And it also speaks to the psychological or emotional nature of inflation. In fact, the slow burn and ambiguity about rising import prices due to tariffs could actually be particularly potent in stoking inflation precisely because it isn’t an expected or one-off increase. Rising yet volatile energy prices can also have this impact.

When only one category goes up sharply, it may feel like inflation even though the overall picture is more balanced. For example, in the past year, certain items like eggs, used cars and electricity have all seen price increases well above the average – eggs rose more than 16% during one 12-month period, used car prices climbed about 6%, and electricity costs went up around 6% as well. Natural gas has also surged, with prices rising nearly 14% in a year. These jumps are real and noticeable, especially for households that spend heavily on those items. But at the same time, other categories have stayed flat or even declined, which is why the overall inflation number is usually lower than what these headlines suggest.

Finally, it’s worth noting that there’s no such thing as “one” inflation rate that applies to everyone equally. The official measures are averages, and what you personally experience depends heavily on your own spending patterns. If your household budget leans toward categories that have been rising faster – such as food, energy or housing – you may feel like your inflation rate is much higher than what the government reports. On the other hand, if you spend more on goods or services that have remained stable or become cheaper, your personal experience of inflation may be lower. In other words, inflation is not just a national statistic; it’s also a personal one.

Understanding these differences – CPI, core CPI, PPI, PCE and the distinction between one-time price shocks and sustained increases – can help you cut through the noise. Inflation is complex, but by looking beyond the headlines, you can better understand both the broader economy and how it affects your day-to-day life.