The purpose of this paper is to examine the composition of inflation over time. The authors calculate the contributions to inflation for individual series of the consumer price index (CPI) and personal consumption expenditures price index (PCEPI) and then aggregate those contributions into major consumer expenditure categories. This technique provides a wealth of information concerning aggregate inflation behavior in a concise way, enabling the authors to describe the composition of inflation at any point in time. A particularly important benefit of this method is that it allows them to distinguish broad-based changes in inflation from changes due to relative price movements of a few components. The authors examine long-term trends in contributions to PCEPI core inflation and make inferences about the direction of inflation in the near term. In addition, they examine the decline in CPI core inflation over the 2002–03 period and find that the decline was largely driven by relative price changes of two components.
JEL classification: C43, E31
Key words: CPI, consumer price index, PCE price index, inflation, prices
The authors thank Robert Cage and Mary Lynn Schmidt for their invaluable help with BLS methodologies and Juan Rubio-Ramírez and Ellis Tallman for helpful comments. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System, or The Brattle Group. Any remaining errors are the authors’ responsibility.
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