Inflation is defined in the textbooks as an increase in the average price level. It’s not an easy thing to measure, covering such large items real estate and complex items such as medical care. The Consumer Price Index is based on a “basket of goods and services” that consumers typically purchase. Every month, the Bureau of Labor Statistics (BLS) sends out hundreds of “shoppers” who collect prevailing prices on the well- defined items in the basket. The cost of that basket is divided by the cost of the same basket in a base period to form an index of the percentage change, which is “inflation” (or “deflation” if prices fall). The Federal Reserve prefers a more refined index based on the Personal Consumption Expenditures (PCE) deflator.
Chart 1 shows the PCE inflation rate since 1973 and the percent of owners that reported raising their average selling prices 3 months earlier (e.g. the April survey, “2nd quarter” reports on price changes in the months…