Three separate government agencies calculate inflation using their own methods.
The Consumer Price Index (CPI) is calculated by the Bureau of Labor Statistics. This is used for calculating the interest rate on inflation-adjusted Treasury bonds (I-Bonds and TIPS).
The Personal Consumption Expenditures Price Index (PCE) is calculated by the Bureau of Economic Advisors. This was released today. The Fed prefers the PCE to the CPI.
The Fed calculates its own “Sticky Price Consumer Price Index less Food and Energy” from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis.
In July, the Consumer Price Index for All Urban Consumers was unchanged, seasonally adjusted, and rose 8.5 percent over the last 12 months, not seasonally adjusted. The stock market celebrated this “unchanged” month because traders speculated that the Fed would stop raising the fed funds rate sooner.
Today, the July PCE index was 6.3%, which is slightly below June’s PCE index. The market certainly isn’t celebrating this, especially because Powell himself announced today that it’s way above the target of 2% so the fed funds rate will need to be raised even if it causes pain.
Powell is also looking at the Sticky Price Consumer Price Index less Food and Energy and not liking what he sees.
This doesn’t bode well for asset prices.