Measuring Prices and Pay: Eight Gauges of Inflation

Start where goods change hands between businesses. The Wholesale Price Index tracks a basket of goods traded between firms, and some countries have used it as their main inflation gauge, though the United States does not publish one and uses the Producer Price Index for the same purpose.

The Producer Price Index measures the selling prices domestic producers receive. The Bureau of Labor Statistics has compiled it since 1902, and it was originally called the Wholesale Price Index until its 1978 renaming. Because producer price changes often precede retail changes, it is widely watched as a leading indicator.

Now the consumer side. The Chained CPI updates its basket weights every month to capture consumers switching to goods whose prices rose more slowly, so it typically shows inflation roughly a quarter to three tenths of a percentage point below the standard CPI. That gap changes the size of cost of living adjustments indexed to CPI measures.

The Harmonised Index of Consumer Prices uses one methodology across European Union member states so inflation is comparable across the euro area. The European Central Bank aims to keep its year on year increase near two percent over the medium term, and it is also used to test the euro adoption inflation criterion.

The Federal Reserve prefers the PCE price index, particularly the core measure excluding food and energy, as the basis for its 2 percent long-run target. It draws on business-survey data from the Bureau of Economic Analysis rather than the household surveys behind the CPI, and it updates its expenditure weights continuously.

The GDP Deflator is the broadest price measure, the ratio of nominal GDP to real GDP times 100. It is not tied to a fixed consumer basket, so it follows whatever the economy actually produces, and it is published quarterly with GDP figures to convert nominal GDP into real, inflation-adjusted GDP.

Prices are only half the story, so the path turns to pay. Average Hourly Earnings is published monthly by the Bureau of Labor Statistics in the same Employment Situation report as nonfarm payrolls, and its year-over-year change is the most commonly cited wage-growth figure, which the Federal Reserve watches for wage-price pressure.

The Employment Cost Index closes the path. Published quarterly by the Bureau of Labor Statistics since 1975, it combines wages with employer-provided benefits and holds the mix of occupations and industries fixed, which is why the Federal Reserve treats it as a reliable gauge of underlying wage inflation.