Have you noticed that prices are going way up, but the government still gives us a low number for inflation? There's a reason for that. In 2000 the Federal Reserve switched to the PCE (Personal Consumption Expenditures price index, or Core Inflation) instead of the CPI (Consumer Price Index, or Headline Inflation) to produce a smaller value. This can be justified by noting that inflation has a large psychological component. Those green papers with Franklin's picture are only worth something if people believe they are.
But it is getting a bit ridiculous. First they remove 'volatile' products (such as gas and food) from consideration, as those prices may fluctuate temporarily. But the huge increases in those prices are not temporary. Gas is high and will continue to rise because of billions of people in China and other developing countries buying cars and using energy. It's a simple supply and demand problem. It has very little to do with middle east tensions. And food price increases reflect gas price increases.
Next, they consider consumer substitutions. The idea is if price fluctuations temporarily lower the price of an alternative, so consumers switch products, then the other product can be used in the PCE. The problem is, the change in buying habits may be permanent too.
For example, you bought a Toyota last time for 10k. This time, you have 11k to spend. You can't afford a Toyota, which is now 20k, so you have to buy a Yugo. The PCE substitutes your Yugo for the Toyota and sees 10% inflation. But the actual inflation was 100% over that time period.
Since the categories of things consumers spend money on is relatively constant, and they tend to spend all their money, the PCE most closely measures the rise in consumers'
income.
Here's how the fed describes it:
"The chain-type price index for PCE draws extensively on data from the consumer price index but, while not entirely free of measurement problems, has several advantages relative to the CPI. The PCE chain-type index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI. In addition, the weights are based on a more comprehensive measure of expenditures. Finally, historical data used in the PCE price index can be revised to account for newly available information and for improvements in measurement techniques, including those that affect source data from the CPI; the result is a more consistent series over time."
—Monetary Policy Report to the Congress, Federal Reserve Board of Governors, Feb. 17, 2000
Guys, that "upward bias" you are tying to manipulate away is called "inflation".