When will Fed stop raising interest rates? And how much inflation do we have, anyway?

When will it all end?

A big question on the mind of many is when the Federal Reserve will stop raising interest rates. An answer to this question rests on another question: When will the rate of inflation slow or decline? Fed officials have said they want to see annual inflation closer to 2%.

This question begs yet another: How do you measure inflation?

The Consumer Price Index, or CPI, is the most widely followed measure of inflation. The index calculates the cost of a basket of goods and services for the “typical U.S. household” relative to the cost of the same items in the previous period.

By this measure, the U.S. Bureau of Labor Statistics tracks the goods and services a “normal” household regularly purchases. The index is calculated by holding this basket of goods constant while following price changes for each item. The percentage change in the index gives us an inflation rate.

The CPI rose 0.4% in September. It has risen 8.2% over the past year. Here, in what the BLS calls the Mountain West region, inflation is running even hotter at 9.6% annually.

An additional concern for some is the still higher inflation rate for important living expenses. For example, the BLS reported that the cost of utility (piped) gas service rose 2.9% in September and is up 33% since this time last year. It’s likely to be a tough winter for many.

But Federal Reserve policy makers may not be watching these costs. Fed policy makers use a different gauge of inflation called the personal consumption expenditure, or PCE, index.

This index does not use a “basket” for the “typical” household, but rather estimates the prices of everything bought and sold across the economy. By looking at more prices across more markets, this measure of our cost of living tends to increase at a slower rate than the CPI does. The Commerce Department’s most recent report for the PCE said the cost of living is rising at an annual rate of 6.2%.

Furthermore, for the 2% policy goal, the Fed prefers to watch the PCE-less food-and-energy sub-index, which is now rising at just 4.9% annually. Using this measure, the Fed’s interest rate policies could change even if the price of feeding our family and heating our homes is still rising.

So, it begs the question: Is the rate of inflation rising or slowing? It’s hard to say. And it’s even harder to say when the Fed will stop raising interest rates.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa, Idaho. prcrabb@nnu.edu