Federal Reserve policymakers assess shifts in inflation by tracking various price indexes. A price index gauges how the cost of a specific basket of goods and services changes. The Fed monitors multiple indexes because they track different items and utilize distinct calculation methods, which can sometimes result in conflicting signals regarding inflation.
The Federal Open Market Committee (FOMC) has determined that a 2 percent annual increase in the personal consumption expenditures (PCE) price index—which is produced by the Department of Commerce—is most consistent with the Federal Reserve’s long-term goals of price stability and maximum employment. When businesses and households can anticipate stable, low inflation, they are better equipped to make informed decisions about investing, borrowing, and saving, all of which support a healthy economy and the prosperity of all <a core" inflation metrics to help pinpoint underlying trends. The most common core inflation measures exclude items that experience frequent or dramatic price swings, such as energy and food. For these goods, a significant price shift in one period does not necessarily predict a similar change in the next. Although food and energy represent a significant portion of most household budgets—and the Fed ultimately aims to stabilize overall consumer prices—core inflation measures that omit volatile items remain useful for gauging long-term trends.
