Inflation Dictionary: Your Guide to the Jargon

Here's what experts mean when talking about ‘CPI’ and 'soft landing'

Custom image of a laptop with a search tool searching on the word 'CPI.'

The Balance / Alice Morgan

Higher and higher inflation may seem relentless, but what exactly is driving it and what can be done? Government officials and the media are abuzz with talk of things like core inflation, supply chain problems, and interest rate hikes, but these terms can be opaque, to say the least. 

 As prices rise faster than they have since 1981, here’s how to translate the 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 accelerated to 8.6% in May from 8.3% in April, according to the latest reading of one widely used measurement, the Consumer Price Index (see definition below). In other words, overall, prices in May were 8.6% higher than they were in May 2021. For context, the inflation rate has stayed around or below 3% most years since the early 1990s, and the last time it was this high was all the way back in 1981.

Because prices are rising so much faster than usual, the big question is how long it will last and what can and should 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. 

To that point, the government, via the Federal Reserve, has pulled back its support to curtail the “too much money” factor, raising the cost of borrowing by increasing its benchmark interest rate. But raising the rate (see below) risks higher unemployment and hitting the brakes on economic growth, so it’s not always an easy choice. Making matters worse is the war in Ukraine, which sent the price of oil and other commodities higher amid sanctions against Russia and other supply disruptions in the region.


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. PCE in April (May data isn’t out yet) decelerated to 6.3% from 6.6%. 

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 decelerated to 6% from 6.2% in April.

Interest Rates

The Federal Reserve aims for PCE inflation of around 2% on average, over time. One tool the Fed has to control inflation is raising the benchmark interest rate, known as the fed funds rate, which influences a wide array of other interest rates, like those on credit cards, auto loans, and mortgages. So far this year, Fed officials have raised the target range for the rate by 0.25 percentage point, bringing the fed funds rate to 0.75%-1%. Several more rate hikes are planned over this year and next. When interest rates go up, it becomes more expensive to borrow money to purchase things, so demand for goods and services should go down. That, in turn, should reduce inflation.

Soft Landing

When you raise borrowing costs to reduce inflation, you are also deliberating slowing down the economy. But like an airplane, you want a “soft landing”—not a crash—for the economy. That’s why the term is often used to describe the Fed’s goal when it’s in inflation-fighting mode.

In other words, the Fed has started to raise its benchmark interest rate, the fed funds rate, to cool the economy and rein in the sharp increases in consumer prices. But Fed officials must not overdo it, slowing it so much that the economy slips into a recession. That would be a very hard landing. 

It’s a delicate balancing act, and one that Fed Chair Jerome Powell has acknowledged is not going to be easy. Fed officials believe the economy is strong enough that it can be brought in for a soft landing, but some economists think the odds are against it.


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 increased 5.9% in January, the highest COLA in four decades.  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 the pace of wage growth with the pace of price increases. These days inflation has been stripping out the benefits of wage increases.

Supply Chain

The supply chain 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.


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. 

Some analysts have said recently that the U.S. economy could be entering a period of stagflation soon.

This story was originally published on Oct. 19, 2021.

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  1.  Bureau of Labor Statistics. “Consumer Price Index Summary.”

  2.  Federal Reserve Bank of Cleveland. “PCE and CPI Inflation: What's the Difference?

  3.  Federal Reserve Bank of St. Louis. ”CPI Vs. PCE Inflation: Choosing a Standard Measure.”

  4. Bureau of Economic Analysis. “Personal Consumption Expenditures Price Index, Excluding Food and Energy.”

  5. Federal Reserve Board. “​​Statement on Longer-Run Goals and Monetary Policy Strategy.”

  6. Federal Reserve. “Summary of Economic Projections.”

  7. Morgan Stanley. “Can the Fed Engineer a Soft Landing?

  8.  Federal Reserve. “Speech by Chair Pro Tempore Powell on Restoring Price Stability.”

  9. Social Security Administration. “Latest Cost-of-Living Adjustment.”

  10. International Monetary Fund. “Inflation: Prices on the Rise - Back to Basics: Finance & Development.”

  11. Chartered Institute of Procurement and Supply. “What is a Supply Chain?

  12. Federal Reserve. “The Great Inflation | Federal Reserve History.”

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