Dueling Inflation

The Fed came out with its latest assessment of the American economy yesterday, and among its findings is the notion that it sees no inflation looming on the horizon. But just the other day, we talked about the fact that the price of so many commodities has been on the rise, which economists expect will lead to somewhat higher prices at the grocery store. Is the Fed hopelessly out of touch here?

Not really, because the Fed is looking at something different from the price of wheat. The Fed governors are talking about core inflation, which excludes the prices of food and energy, which are seen as too volatile to be reliable indicators of overall costs. The Fed's preferred measure of inflation is the Personal Consumption Expenditures Price Index, or PCE; the one that includes food and energy costs is the Consumer Price Index.

Which is better? If you're strictly measuring the inflationary effects on the economy, we'll trust that the Fed knows what it's doing. But if you're worried about how much this week's trip to the grocery store will cost you, you want the Consumer Price Index.