How Do We Measure Inflation?
One goal of monetary policy is price stability, which requires a measure of prices over time. The gold standard maintained the stability of one price, that of gold. Today, we need to consider a broad array of prices. The Federal Reserve’s policy-making body, the Federal Open Market Committee (FOMC), uses the personal consumption expenditures (PCE) deflator as its index of prices. But what is it, and why does the Fed consider this measure the most suitable?
