K-12 Tax & Spending Climate: How High Is Inflation? It Depends Which One

Justin LaHart:

The inflation numbers that people pay the most attention to and the inflation numbers that the Federal Reserve cares about aren’t the same. In the months ahead, those differences could really matter.

Economists polled by The Wall Street Journal expect Thursday’s consumer inflation report from the Labor Department will show that overall prices in February rose by 7.8% from a year earlier, their biggest gain since January 1982. Core prices, which exclude food and energy items in an attempt to better capture inflation’s trend, are expected to show a 6.4% rise, which would be the biggest gain since August 1982.

The February reading for the Commerce Department inflation gauge that the Fed watches, and bases its 2% inflation target on, won’t come out until March 31. But it will almost certainly show milder price increases than the Labor Department measure. The January core reading for the Commerce Department measure showed a 5.2% gain from a year earlier, for example, versus the 6% gain the Labor Department showed.

The differences between the two inflation measures largely come down to differences in how they are constructed. The weightings for items in the consumption baskets the Labor Department uses to put together its main inflation indexes are based on surveys of urban consumers and only measure out-of-pocket expenses. The Commerce Department’s indexes are based on the actual expenditures of both urban and rural consumers and includes spending done on the part of consumers, such as employers’ contributions to health insurance.