Inflation Dictionary: Your Guide to the Jargon

What do experts mean when talking about ‘CPI,’ ‘stagflation,’ and other terms?

Mother and son shopping at supermarket

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You’ve probably noticed it at the cash register and seen the headlines: all kinds of things are getting more expensive these days.

You might also have seen some of the terms that experts and the media use to describe the phenomenon of increasing prices—many of which are technical and rarely used in everyday life.

Here’s how to translate that jargon.


Inflation is a sustained increase in the average price level of goods and services. While prices of individual products—gasoline or steak, for example—can go up or down, that doesn’t necessarily mean there’s inflation, because inflation is a broad increase in prices. The speed at which prices increase is called the inflation rate, and that was running at 5.4% as of September, according to the latest reading of one widely used measurement, the Consumer Price Index (see definition below). For context, the inflation rate has stayed around or below 3% most years since the early 1990s, and was last this high (tied with June and July of this year) in one month during the financial crisis of 2008.

In other words, prices are rising much faster than usual, and this has ordinary people as well as experts and leaders in business and government wondering how long it will last and what can be done about it.

Inflation happens when “too much money chases too few goods,” according to an old saying in economics. There’s broad debate over exactly what is causing the current inflation trend. But some economists argue the pandemic’s shutdowns and labor shortages have caused difficulties in production and transportation that have given us the “too few goods” part of the equation, while government stimulus measures to combat the pandemic’s economic downturn have provided the “too much money” element.

As for what can be done about it, the government, via the Federal Reserve, can pull on its “too much money” lever and reduce the support it’s currently giving to financial markets. But that would risk higher unemployment and hitting the brakes on economic growth, so it’s not an easy choice.


The Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index are both government measures of consumer prices. The change in them, more often than not measured year-over-year, is inflation when it’s going up, and deflation when it’s going down.

With each index, there is a “headline” inflation rate as well as a “core” inflation rate (see definition below) that strips out prices from the volatile food and energy sectors. The details of how they measure price changes and what they measure are different, and explain why CPI tends to reflect more inflation than PCE.

CPI, released by the Bureau of Labor Statistics, measures how much urban consumers pay for a basket of goods and services based on household surveys. The basket is static, measuring the price changes of the same basket each month, and only accounts for out-of-pocket expenses so items that are not directly paid for—like Medicare or Medicaid—aren’t counted.

In contrast, the Bureau of Economic Analysis’s PCE index reflects the prices of goods and services businesses are selling. It includes those items not directly paid for by consumers, like medical care paid for by employer-provided insurance, and accounts for changing consumer choices, making the basket more variable. For example, if bread gets too expensive and people stop buying it, the weighting of bread drops in the calculation.

Though the government uses CPI to calculate changes to benefits such as Social Security, the Federal Reserve places more emphasis on the PCE index in determining monetary policy. The Fed favors PCE for three reasons: its flexibility to account for substitutions, its more comprehensive coverage of goods and services, and the ability for PCE historical data to be revised extensively compared with the CPI, which is revised only for seasonal adjustments.

Core Inflation Rate

The core inflation rate is a measure of inflation that excludes food and energy costs. While these items are obviously an important part of a household’s budget, they tend to rise and fall dramatically and often. As a result, experts closely study “core” inflation rates for more stable items to get a better idea of long-term trends, an especially important consideration for government policymakers. In the government’s latest CPI report, “core” inflation was 4% in the 12 months through September, the same as the previous month and a bit lower than the headline, or overall, inflation rate. 


COLA stands for “cost of living adjustment,” which is when Social Security and Supplemental Security Income payments are hiked so that recipients won’t see the purchasing power (see definition below) of their benefits eroded by inflation. These payments will be increased 5.9% starting in January, the highest COLA in four decades, the Social Security Administration announced last week.  For the average retired beneficiary, that’s an average boost of $92 a month.

Purchasing Power

Purchasing power means how much you can buy, which is determined both by how much money you have and by how much stuff costs. One way of measuring purchasing power is the government’s “real earnings” statistic, which compares wage growth with price increases.

Workers are in high demand these days, and they’ve been getting such big raises that their purchasing power has actually increased the last two months, even as higher inflation has made their dollars worth less and less. Taking a longer view, however, real hourly wages as of September were still down 0.8% from the previous year.


Transitory has become a much-used adjective during the pandemic to describe the nature of the spike in inflation we’ve seen this year. Federal Reserve and Treasury officials have been using the word to convey their belief that the high inflation rates we’ve experienced will be resolved when supply chain bottlenecks sort themselves out and a more normal economy returns.

But with inflation looking like it will last longer than originally expected, some officials seem to be challenging that narrative. Atlanta Fed President Raphael Bostic recently said that transitory “has become a swear word to my staff and me over the past few months,” saying that the word suggests “of brief duration,” which isn’t accurate to describe current inflation dynamic. He suggested using the word “episodic” instead, meaning that once the pandemic is behind us, inflation may be, too. 

Inflation Expectations Unanchored

The phrase inflation expectations unanchored” describes what happens when consumers start to believe inflation will rise above the Federal Reserve’s longer-term target and, importantly, begin altering their behaviors based on that expectation.

When determining monetary policy, the Fed considers actual inflation rates as well as inflation expectations. It aims for both to hover around its 2% goal on average, over time. Fed Chairman Jerome Powell has said the central bank can overlook temporary swings in inflation, as long as inflation expectations remain “anchored” near the Fed’s goal.

Recently, however, consumer surveys have shown that inflation expectations have been at more than twice the Fed’s goal since May, thus becoming unanchored—and possibly leading the Fed to think about aggressively raising rates to keep price increases in check.

Supply Chain

“I know you’re hearing a lot about something called ‘supply chains’ and how hard it is to get a range of things from a toaster to sneakers to a bicycle to bedroom furniture,” President Joe Biden said in a recent speech.

The supply chain he referred to is the entire process of producing and transporting goods, from raw materials to factories to your front door or shopping cart.

When the supply chain gets clogged up somewhere along the way—for example, at a port that can’t unload cargo ships fast enough—a “bottleneck” is created, and whatever’s stuck on the wrong side of the bottleneck can become more scarce and expensive on the other side, contributing to higher inflation. Economists currently see pandemic-created bottlenecks everywhere, from homebuilding and heating oil to car manufacturing.

Biden announced last week that the all-important Port of Los Angeles was switching to 24/7 operations in an effort to unclog a particularly troublesome bottleneck.


Stagflation is used to describe an economy that’s experiencing high inflation, high unemployment, and slowing economic growth, all at the same time. It’s unusual because inflation is supposed to occur when unemployment is low and the economy is growing. 

Whether the U.S. economy is entering a period of stagflation has been hotly debated lately, with the labor market and economy losing momentum even as this year’s inflation spike is forecast to last longer than expected.

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