The 31 Flavors Of “Inflation” – Do We Really Understand These Numbers?

February 23, 2022

By Dr. George Calhoun
Hanlon Investment Management Advisory Board Member

Executive Director of the Hanlon Financial Systems Center

Download the PDF version of this Educational Series.

Annualized Inflation

Various Measures of Annualized Inflation for December 2021 CHART BY AUTHOR

What is the current rate of inflation?

When you ask a question and get too many different answers, it means something’s wrong. In the case of “inflation” there are at least two dozen “official” answers – price-change indexes created, sponsored and used by government policy-makers – which differ from each other over a range of more than 2 to 1 in magnitude. What is presented to the public every month as a simple, unitary Fact – the “headline number” that flashes across the ticker-signs in Times Square, and crawls under the newscasters on CNBC and Bloomberg TV and the rest – is just one of many data-points, and is generally considered the least reliable of all of them.

“Inflation” is now supposedly “surging” – exciting the commentariat, creating anxiety among consumers, disrupting business, impacting public policy, pushing other issues and initiatives aside. Other than war, inflation is seen by many as the greatest threat to the republic…

For this reason, it is appropriate, and hopefully useful, to review the (too) many ways in which “inflation” is measured.

In the following list, the figure for each inflation metric is given for the annualized inflation rate reported in December 2021 – i.e., the 12-month change in the index from December 2020 to December 2021.

The First Family of Inflation Metrics: The CPI

The Consumer Price Index (CPI) is prepared by the Bureau of Labor Statistics (BLS), a branch of the Department of Labor , which every month reprices a basket of “goods and services that people buy for day-to-day living.” The structure and contents of the basket contents are changed through “intentionally infrequent” revisions.


WASHINGTON, DC – MAY 26: U.S. Sen. Ron Johnson (R-WI) speaks during a news conference about inflation on Capitol Hill on May 26, 2021 in Washington, DC. The group of Republican senators discussed rising consumer prices and the potential effects of inflation on families and businesses recovering from the pandemic. (Photo by Drew Angerer/Getty Images) GETTY IMAGES

The CPI gains much of its prominence, and its priority among all the competing metrics, because one version of it is used to update the Cost of Living Adjustments (COLA) to entitlement programs like Social Security. Another version of the CPI is the basis for setting the interest rate on inflation-protected Treasury Bonds (TIPS), and for Series I Savings Bonds.

In short, the CPI is more than just a passive measure. It drives a significant portion of the government’s spending. It is what the politicians pay attention to. Most reporting never goes beyond citing this basic number.

There are currently at least four official versions of the unadjusted CPI.

CPI-U: Up 7.0% (annualized) in December 2021

The most common version of the CPI is the CPI-Urban (CPI-U) described as a “U.S. City Average” which covers either 88% or 93% of the U.S. population, depending on which branch (the Federal reserve, or the BLS respectively) of the federal government you consult. (Note that this discrepancy amounts to about 15 million people, not a small number. Such uncertainty is just a foretaste of the variability and imprecision that surrounds this subject.)

The CPI-U is the basis for setting the interest rates for TIPS and I-Bonds. It is the Headline Number. But it is not the only version of the CPI.

CPI-W: Up 7.9% (annualized) in December 2021

The CPI-W covers either 29% or 32% of the population. (Both figures are from the BLS.) Its history is rooted in the labor movement and the need for a measure of inflation appropriate to the “working class.”

  • “The urban wage earner and clerical worker population consists of consumer units consisting of clerical workers, sales workers, craft workers, operative, service workers, or laborers. (Excluded from this population are professional, managerial, and technical workers; the self-employed; short-term workers; the unemployed; and retirees and others not in the labor force.) More than one half of the consumer unit’s income has to be earned from the above occupations, and at least one of the members must be employed for 37 weeks or more in an eligible occupation. The consumer price index for urban wage earners and clerical workers (CPI-W) is a continuation of the historical index that was introduced after World War I for use in wage negotiation.” – BLS

The CPI-W is the basis of the COLA adjustment. It is often the highest of all the inflation metrics.

CPI-E: Up 6.4% (annualized) in December 2021

The CPI-E – E is for Elderly – is a version of the CPI intended to “account for the fact that the consumption patterns of seniors are different from those of younger people.”

Chained CPI-U: Up 6.9% (annualized) in December 2021

A problem with the CPI-U is that the basket weights are updated only every two years, and may not track changing consumption patterns well. The so-called Chained CPI-U is updated monthly.

CPI Family of Inflation

CPI Family of Inflation Indices (December 2021) CHART BY AUTHOR

CPI Summary

These are the unadjusted members of the CPI family of indices. They all draw from the same basket of goods and services. They differ in terms of the populations they apply to, the weightings of some of the components, and the frequency of the updating.

The CPI family holds the place of prominence among the many measures of “inflation.” It is also deeply flawed, in the judgment of many independent observers. In the 1990’s, the criticism of the CPI by the Federal Reserve and others led to a study by a Congressional Commission including prominent academic economists, which concluded that the CPI was systematically biased, producing inflation figures that were too high by 20-30% – adding 1-2% to the published inflation rate (described in my previous column).

The Second Family of Inflation Metrics: The PCE

The Bureau of Economic Analysis (BEA), part of the Department of Commerce, has developed another comprehensive index, known as the Personal Consumption Expenditure Index (PCE). Many people consider it to be superior to the CPI. It was designed upfront as a chain-type index, and so is updated every quarter (rather than every 2 years like the standard CPI). In addition to other technical improvements, the PCE is said to adjust for “substitution effects” — where consumers adapt to price changes by shifting consumption patterns (which the CPI does not account for).

PCE: Up 5.8% (annualized) in December 2021

In 2000 the Federal Reserve switched to the PCE as its preferred inflation metric, which it tracks for purposes of calibrating monetary policy measures. For example, the Federal Reserve’s inflation target of 2% is referenced to the PCE (not the CPI).

The PCE generally runs lower than the CPI by 0.3-0.4%. For December 2021 the difference was 1.2%.



Adjusting for Volatility: Core CPI and Core PCE

The CPI and the PCE are too volatile. The overall indices are skewed by the excessive volatility of certain components, especially food and energy. The effect of energy price swings is especially striking.


Excessive Volatility of Energy Component of the CPI CHART BY AUTHOR

Large monthly swings impair the usefulness of the metric, obscuring the longer term trend. To mitigate the excess volatility, both the CPI and the PCE are also offered with Food and Energy components removed.

  • Core CPI: Up 5.5% (annualized) in December 2021

  • Core PCE: Up 4.9% (annualized) in December 2021

The Core CPI and Core PCE are both lower than their unadjusted counterparts over the past two years, with much lower volatility. The Core PCE runs about 0.3% lower than the Core CPI over this period. However, the difference was much larger for December 2021 – the Core CPI was a full 150 basis points lower than the unadjusted CPI.

Core CPI and PCE, 2020-2021

Core CPI and PCE, 2020-2021 CHART BY AUTHOR

Trimmed Inflation Indices

The all-inclusive indices (the CPI and PCE) can also be distorted by the effect of large outliers. For example, in September 2020, the “Used Car” component exploded. After a decade of essentially zero inflation, inflation for “Used Cars” rose to 45% by June 2021 (annualized). The increase was so large that it contributed a full one-third of the annualized inflation rate that month.

Inflation of the Used Cars

Used Cars as an Outlier in 2020-2021 CHART BY AUTHOR

Such outliers have evidently powered much of the recent reported surge in “inflation.” Economists at several of the Federal Reserve branches have developed modified versions of the PCE to correct for this problem.

Median PCE: Up 3.6% (annualized) in December 2021

The Cleveland Federal Reserve has promoted a version called the Median PCE.

  • Median PCE inflation is the one-month inflation rate of the component whose expenditure weight is in the 50th percentile of price changes.”

Cleveland Fed’s Median PCE vs Standard and Core PCE CLEVELAND FEDERAL RESERVE

This is a very simple solution. Interestingly, the Median PCE typically runs a bit higher than the standard PCE or the Core PCE, but it has shown less acceleration in the latest burst of “inflation.” This indicates that the current inflation is being driven by the outliers.

Trimmed Mean PCE: Up 3.0% (annualized) in December 2021

The Dallas Federal Reserve has developed a more complex version, called the Trimmed Mean. Starting with the PCE basket, they analyze the impact of different tail-trimming regimes to optimize their index.

  • “We calculated a new set of optimal trimming proportions. Those turn out to be 24% trimming from the lower tail and 31% trimming from the upper tail.”

The result is the lowest reading of all the metrics presented here, just 3% in December.

16% Trimmed Mean CPI: Up 4.9% (Annualized) in December 2021

Another proposed metric from the Cleveland Fed is based on the CPI, and described thus:

  • “The 16% Trimmed-Mean Consumer Price Index (CPI) excludes the CPI components that show the most extreme monthly price changes. This series excludes 8% of the CPI components with the highest and lowest one-month price changes from each tail of the price-change distribution resulting in a 16% Trimmed-Mean Inflation Estimate.”

Again, the 16% Trimmed Mean CPI normally runs a bit higher than the unadjusted CPI and the Core CPI. A small handful of outliers on the upside (8%) are over-powering and distorting the Unadjusted and Core CPI measures in the latest period.

Sticky Price Indices

The economists at the Atlanta Federal Reserve have developed another approach to mitigating the skewing effect of volatile or outlier components that can distort the meaning and measurement of “inflation.” The idea is based on the fact that some prices change very frequently (monthly or quarterly) and other prices change much less frequently (yearly or less often). They refer to these categories as “flexible” and “sticky” prices.

The Atlanta Fed has built a suite of 6 alternative metrics around this concept. These measures are based on the CPI.

  • Sticky CPI: Up 3.7% (Annualized) in December 2021

  • Core Sticky CPI: Up 3.5% (Annualized) in December 2021

  • Sticky CPI Excluding Shelter: Up 3.7% (Annualized) in December 2021

  • Core Sticky CPI Excluding Shelter: Up 3.3% (Annualized) in December 2021

  • Flexible CPI: Up 17.9% (Annualized) in December 2021

  • Core Flexible CPI: Up 18.6% (Annualized) in December 2021

The distinction between “sticky” and “flexible” components of the CPI is a very powerful one.

Sticky vs Flexible

Sticky vs Flexible Components of the CPI CHART BY AUTHOR

And again, we see that the stable “sticky” components typically show higher inflation than the more volatile components – until the last year. The recent surge is being yanked upwards by a small subset of the CPI Basket. Only 30% of the basket is classified as “flexible” — and it includes the usual suspects (the “frequency of adjustment” figure in the table below, which refers to the frequency of price changes, is measured in “months”):


“Flexible” Components of the CPI ATLANTA FEDERAL RESERVE

Summing Up

Comparing all of these measures of “inflation” – across the board — is a bit unsettling. Do we really have a grasp on this phenomenon?

Annualized Inflation

Various Measures of Annualized Inflation for December 2021 CHART BY AUTHOR

Even this is not the whole story. All of the measures described so far are based upon the “consumer basket” models embodied in the CPI and the PCE. There are many other measures of price trends, including:

  • the “Deflators” – the GDP Deflator, the PCE Deflator, the OECD Price Deflator
  • The Producer Price Index (PPI), in several versions
  • Measures of Inflationary expectations, drawn from surveys of Consumers (Michigan) and Professionals (Philadelphia Fed)

These indexing concepts diverge further from the structure and philosophy of the CPI and the PCE. They are based upon production (rather than consumption), and upon expectations, rather than consumer baskets and published prices or transactions.

There are still other, newer concepts and measurement techniques emerging for measuring inflation using automated algorithms to “scrape” the Internet for price information. This holds the promise of vastly densifying the texture of the price information – one pilot study of price-scraping in the grocery industry in the UK claims that such methods can collect 30 times as much data, on a daily basis, compared to the more or less monthly manual batch-collection process. Subjects for future columns.

“Inflation” is still (or is becoming) an unstable concept. When there are over a dozen indices, purportedly measuring the same thing, and applied for the same purposes, and yet yielding so many and such different answers…we may wonder if we really know what we are trying to measure. When the measures drawn from the most official sources vary as much as they do here, it is a problem for those policy-makers who would like to rely upon them as guides to action.

An analogy: Imagine driving a car at speed down the highway, or through a crowded city perhaps, while the instruments on the dashboard keep flashing different numbers for speed, fuel level, engine temperature, blind spot alerts, etc. Are you going 60 mph or 30 mph? Is the gas tank full, or nearly empty? Is it safe to pass or not?

There are indications in some of these measures (to be explored in a subsequent column) that a relatively small number of the basket components have quite suddenly gone haywire, and have wrenched the broader inflation indices out of their normal tracks. The superficial interpretation is that “inflation is back” or “inflation is everywhere” — which is certainly how many of the media accounts portray things. But what if, instead, our instrumentation has been thrown off by the sudden and severe misbehavior of a few “outliers”?

This is not to say that there is no price pressure right now. There is. But if it is largely confined to a few items in the basket – gasoline, automobiles new and used, hotels, a few food items – which (1) are certainly volatile, (2) change prices frequently, (3) are obviously affected in some cases by supply bottlenecks (as described in the previous column on “Used Cars” — the worst of the current outliers), and (4) generally have manifested lower inflation than the rest of the basket – except in the last few quarters… all this may suggest that alleviating these price pressures will call for a more surgical response than simply raising interest rates, which is undoubtedly the bluntest instrument in the economists’ little black bag.

Hanlon Investment Management is an SEC registered investment adviser with its principal place of business in the State of New Jersey with offices at 3393 Bargaintown Rd., Egg Harbor Township, NJ 08234. Being a registered investment advisor does not imply any level of skill or training. This material should not be construed as an offer to sell or the solicitation to buy any security. We are not soliciting any action based on this material. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. Hanlon Investment Management and its representatives are in compliance with the current registration and notice filing requirement imposed upon registered investment advisers by those states in which Hanlon Investment Management maintains clients. Hanlon Investment Management may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by Hanlon Investment Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status, service and fees of Hanlon Investment Management, please contact Hanlon Investment Management or refer to the Investment Adviser Public Disclosure web site (

For additional information about Hanlon Investment Management, including fees and services, send for our disclosure statement as set forth on Form ADV from Hanlon Investment Management using the contact information herein. Please read the disclosure statement carefully before you invest or send money.