To measure is to know in the forest of inflation figures

The consumer price index (CPI) is without a doubt the most well-known inflation measure. When we talk about 6,4% currency depreciation in the Netherlands, we are referring to the CPI figure. However, unlike distances, there are multiple ways statisticians and economists calculate inflation. Where a meter is always and everywhere 100 centimeters, we can talk about inflation at exactly the same time in the same country and still recite different figures. 

If I say, for example, that Dutch inflation in January was not 6,4 percent but 7,6%, then I'm also right. This is the currency depreciation calculated according to the European definition, the so-called HICP figure. HICP stands for Harmonized Index of Consumer Prices, the European uniform inflation index, which makes it possible to compare figures from different countries. Without HICP, we compare inflation pears to inflation apples. But those are not the only two inflation flavors in statistics country. 

There are also so-called core inflation figures for both, both CPI and HICP. This is often the inflation figure excluding food and energy prices, but there are also versions without energy and unprocessed food and also excluding energy, food, alcohol and tobacco. This core inflation approach originated in the early XNUMXs, when prices started to rise rapidly due to, among other things, printing too much money. In the US they wanted to slow down inflation a bit and one of the ways was to cut energy and food prices out. 

Trimmed Inflation Rate
Trimmed inflation rates also exist in several countries, such as the trimmed mean PCE inflation rate in the US. PCE? Yes, that's another inflation measure, one that the Fed likes to use. PCE stands for Personal Consumption Expenditures and the way inflation is measured with that inflation gauge is again different from how a CPI statistician works. Should I mention that PCE inflation also has a core inflation variant?

In the US, the regional central bank in Dallas keeps trimmed mean PCE. In doing so, the bank omits the 24% of the smallest price changes and 31% of the largest price changes. Their colleagues at the regional central bank in Cleveland have yet another favorite inflation toy, median inflation. That yardstick only looks at the price development of the median item on which Americans spend money from the list of all items whose price has changed. 

Sticky prices index
In order not to be left behind, the economists from the central bank in Atlanta developed the sticky-price CPI, in good Dutch the sticky price index. This is the change in the price of goods and services whose prices change very slowly or that stick for a long time. For example, because the market works so inefficiently that changes in supply and demand only affect the price after a long time. The prices in restaurants are an example of this. These do not change often because every price change entails costs, such as printing new menus (economists also call this phenomenon menu costs). It's no coincidence that if you eat out in a high inflation country, you'll often see little stickers on the prices of dishes, with the price written by hand. It is a way to avoid the mentioned menu costs.  

In general, the further away you get from the broadest consumption basket, the CPI basket, the lower inflation becomes. This may explain the popularity of these alternative inflation measures. The International Monetary Fund (IMF) recently concluded that inflation is all the more stable the more product groups that change above average prices are excluded. Thank you the cuckoo, really. The more products whose prices change you let out, the more stable the inflation. Who would have thought that!

Index from the top monetary hat
The presence of all these different measures also means, in normal times, that central banks that are not eager to raise interest rates (much) can always conjure up an index from the top monetary hat to show that interest rate increases are unnecessary. Because inflation is not a problem. However, sometimes, very occasionally, that monetary hat stays empty. Such as in 2022. Whatever alternative inflation measure you take, the graph has shown a clear increase in recent months and in terms of level it appears that the line is at the level that we last saw a few decades ago. 

The only way to make an inflation chart these days that shows inflation is going down seems to be if you take out all the prices that are going up, say the Super Assymetric Unharmonized Trimmed Über Core Sticky Prices Random Approach Inflation or something. The SAUTUCSPRAI can easily join the inflation benchmark carousel.  

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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