Inflation: A History of Changing Measurements
Inflation is the sustained increase in the general price level, reducing the purchasing power of money. For Temecula Valley homeowners, it influences housing payments, housing costs, groceries, insurance, property maintenance, construction costs, and mortgage interest rates.
America’s inflation measurements have evolved considerably. The Consumer Price Index (CPI) dates to 1919, with historical estimates extending further back. After the United States ended dollar-to-gold convertibility in 1971, the dollar operated under a fully fiat monetary system.
The Bureau of Labor Statistics revised housing measurement in the early 1980s, introducing rental-equivalence methods for homeowners’ housing costs. Since then, expenditure weights, product substitutions, quality adjustments, and individual categories have continued evolving.
These changes aim to reflect actual consumer behavior, although critics argue that some adjustments can understate households’ lived inflation experiences. Which could be why everything feels like prices are double or triple since 2020, yet cumulative inflation by these statistics is around 28% since 2020?
Explore the BLS history of CPI changes.
Is Inflation a Hidden Tax on Americans?
Inflation is often described as a hidden tax because purchasing power declines even without a legislated tax increase.
Today’s dollar is not redeemable for gold. Instead, its value rests on the monetary system, economic production, public confidence, and demand for dollar-denominated assets.
Since the 2020 pandemic, extraordinary fiscal stimulus, monetary expansion, supply disruptions, and changing consumer demand contributed to significant inflation.
Inflation’s burden is especially noticeable among households whose wages and savings fail to keep pace with rising prices. Effectively with these stats, your purchasing power has decreased by 28% since 2020. So $100,000 in the bank in 2020, has the purchasing power today of $72,000. Wait what, I lose money while my savings sits in the bank? In real-world, that burger went from $8 to $16 or higher or that carne asada burrito went from $7.50 to $17.00.
The Federal Reserve’s Dual Mandate
Congress directs the Federal Reserve to pursue maximum employment and stable prices, alongside moderate long-term interest rates.
The Fed interprets price stability as 2% annual inflation, measured using the Personal Consumption Expenditures (PCE) Price Index.
The challenge? Strong employment can coexist with persistent inflation. Raising interest rates can restrain spending and price pressures, but may also weaken hiring and economic growth.
Global inflation also reflects international energy prices, trade disruptions, currency movements, and monetary policies—not simply decisions made in Washington.
Three Major Inflation Statistics
1. PCE — Personal Consumption Expenditures
Published monthly by the Bureau of Economic Analysis, PCE measures prices paid for goods and services consumed by households, including certain expenditures paid on their behalf.
Its weights adjust as spending patterns change. Core PCE excludes food and energy.
The Fed’s long-run inflation target is 2% for headline PCE, not core PCE specifically.
PCE generally arrives late in the month, reporting the preceding month’s data.
2. CPI — Consumer Price Index
Published monthly by the Bureau of Labor Statistics, CPI measures price changes for a representative basket of consumer goods and services.
Categories include shelter, transportation, medical care, groceries, and energy. Shelter carries substantial weight.
Headline CPI includes all categories; Core CPI excludes food and energy.
CPI typically arrives during the first half of the following month. Although closely watched, it isn’t the Fed’s official 2% target measure.
3. PPI — Producer Price Index
Published monthly by the Bureau of Labor Statistics, PPI tracks changes in selling prices received by domestic producers.
It measures prices at different production stages, including goods and services.
PPI can signal developing business cost pressures before they reach consumers, although those costs aren’t always passed along.
PPI generally arrives around the middle of the following month. It has no equivalent Fed inflation target.
Are These Inflation Statistics Antiquated?
Not necessarily. CPI, PCE, and PPI remain essential, regularly updated economic tools.
However, they are averages, not personal household budgets. Housing affordability, homeowners insurance, medical expenses, and regional costs may behave differently from national indexes.
A Temecula homeowner’s actual inflation experience can therefore differ substantially from published headline inflation.
Inflation, Mortgage Rates, and FedWatch
The Fed influences short-term borrowing costs through its policy rate.
Mortgage rates, however, respond more directly to longer-term Treasury yields, mortgage-backed securities, expected inflation, and investor risk premiums.
Consequently, a Fed rate cut does not guarantee lower 30-year mortgage rates.
Investors monitor inflation reports, employment data, and the CME FedWatch Tool, which estimates market-implied probabilities of future Fed policy decisions.
Money Printing, Government Debt, and the Debt Cycle
Beginning in 2020, federal stimulus and Federal Reserve asset purchases helped expand liquidity while supporting households, businesses, and financial markets.
The money supply expanded rapidly, contributing to inflationary pressure alongside supply shortages and demand shifts.
However, money creation and government borrowing are different mechanisms: federal deficits are financed primarily through Treasury securities, not simply by printing currency.
As federal debt surpassed $40 trillion, persistent deficits and rising interest expenses create growing fiscal challenges and a push to $50 trillion in US debt and QUICKLY.
Globally, aggregate debt estimates approaching $343 trillion underscore how widespread borrowing has become, although definitions and reporting periods differ.
Could this become a dangerous debt cycle? Potentially. When borrowing costs and deficits reinforce one another, governments face increasingly difficult fiscal choices. But an inevitable collapse is not a foregone conclusion.
Follow the U.S. Treasury’s Debt to the Penny and the Congressional Budget Office for official debt and budget projections.
Final Thoughts: Why Inflation Matters to Temecula Valley Mortgages
Inflation affects far more than grocery bills. It influences household purchasing power, mortgage-backed securities, bond yields, Federal Reserve policy, and ultimately mortgage affordability.
Understanding how inflation is measured—and how government spending, monetary policy, and economic expectations interact—helps borrowers distinguish financial reality from interest-rate predictions.
Coming Next in the TVMRC Inflation Series:
Part Two: Cumulative Inflation — Why Lower Inflation Doesn’t Mean Lower Prices.
Part Three: Transitory Inflation — When Price Pressures Fade and When They Persist.
Part Four: Inflation by Topic – By Price, by quantity, and by quality
Part Five: Stagflation
Part Six: US Admin – Old way of driving interest rate policy vs new way of determining policy thru US Credit and Strength
Part Seven: Mechanisms for controlling monetary policy
