Solutions Economic and Market Watch

Welcome to the Economic & Market Watch podcast for the week of November 3, 2025. This is Antony Davies.

This week, I have a quiz for you. What's the most recent reading on inflation?

Is it (a) 2%, (b) 3%, (c) 4% or (d) what's inflation?

Weirdly, the correct answer is (d) what's inflation?

We talk about inflation as if it's a well defined number, like how many kids you have or how many hours there are in a day. The media confidently announces inflation and we dutifully quote them as if we're repeating a solid truth.

But the reality is uncomfortably fuzzy.

For example, annual inflation is currently running at either 3% or 3.8% depending on whether you compare today's prices to prices last month or to prices at this time last year. You might say that's simply a matter of choice: Do we want to talk about annualized month-over-month inflation or do we want to talk about year-over-year inflation?

But the fuzziness is just getting started.

It's easy enough to talk about inflation when it comes to things like eggs and gasoline, but what about durable goods like cars and appliances?

For example, suppose the price of cars rises 10% this year. What's car price inflation?

You might say 10% because the car costs you 10% more this year than last year. But inflation is an annual measure. And if you keep the car for ten years, that 10% price increase gets spread out over ten years, so you could argue that the car price inflation is 1% per year. Notice that neither answer is obviously better than the other.

Now think about housing. Suppose home prices are the same this year as last year, but mortgage rates have gone up. The increased mortgage rate makes it more costly to own a home this year. Have you experienced house price inflation?

You might say no because the price of the house hasn't changed, but you might say yes because the monthly mortgage payment is higher.

Notice again that neither answer is obviously better than the other.

Now think about different consumers. Inflation measures reflect the experience of the typical consumer, and you may not be typical. If you live near your place of work, gas prices will matter less to you than to the typical consumer. If you have health problems, medical-care costs will matter more.

And what do we even mean by typical? Is the average consumer the typical consumer? Or is the median consumer the typical consumer? Or is the most common consumer the typical consumer?

It turns out that measuring inflation is less like counting the pages in a book than it is deciding whether you liked the story. The former is well defined. The latter could mean many things.

The Bureau of Labor Statistics deals with this fuzziness by producing multiple inflation measures.

The measure you hear repeated in the news is headline inflation. That comes from the consumer price index, or CPI, and includes prices of things consumers buy, weighted according to how much they buy.

Another inflation measure comes from the non-durables CPI. This measure includes prices of non durable goods like food, entertainment and cosmetics, but excludes prices of durable goods like furniture and electronics. A third inflation measure comes from the OER or owner's equivalent rent. This measure spreads the price of housing over time rather than counting the price only in the year a home is purchased. There's a version of inflation that excludes the prices of food and energy and a version that excludes the cost of health care.

There's a version that applies only to wage earners, another that applies only to the elderly, and another that accounts for how consumers switch to cheaper alternatives as some prices rise. No single inflation measure tells the whole story, but each tells part of the story.

This is Antony Davies for the Economic & Market Watch podcast. Thank you for listening. Download the weekly Economic & Market Watch dashboard, and send us email at economicresearch@nrucfc.cop.