Abstract
During periods of rapidly changing prices, it's important to measure inflation in order to monitor price changes and to separate changes in the real value of economic activity from the effect of inflation. Prices paid by consumers are reported each month by the Department of Labor's Bureau of Labor Statistics (BLS) and by the Department of Commerce's Bureau of Economic Analysis in the form of the Consumer Price Index (CPI) and the personal consumption expenditure (PCE) deflator, respectively. '· People generally interpret changes in these measures as changes in the cost of living. Numerous wage contracts, Social Security payments, and some retirement plans peg cost-of-living adjustments to changes in the CPI. However, no index can accurately measure the changes in the cost of living. Thus, we settle for price indexes like the CPI and the PCE deflator. Price indexes are an indication of what a given bundle of goods cost at two points in time. In the following sections, the construction and components of these two widely recognized price indexes are described and some of their major differences are discussed.
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