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Powell & Co. will be pouring over employment reports, as well as data on inflation, to guide their decision.

Prior to the year 2000, the central bank used the Consumer Price Index (CPI) to dissect price movements. However, after extensive analysis, they found that the formula used for calculating the Personal Consumption Expenditure Index (PCE) better captured people’s lived experiences.

Both CPI and PCE have been steadily declining since peaking in the summer of 2022. But a larger question is vexing some economists: What if both ways that we look at inflation are wrong?

A recent NBER working paper, co-authored by Marijn A. Bolhuis, Judd N. L. Cramer, Karl Oskar Schulz & Lawrence H. Summers, wrestles with an answer.

They note that the labor market remains on firm footing and inflation is falling, and yet, people are not exactly doing a happy dance. “This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy.”

The paper’s thesis is that the culprit is borrowing costs, “which have grown at rates they had not reached in decades.”

You may not realize this, but rising interest rates are not accounted for in either the CPI or the PCE. So, if you are one of the millions of Americans carrying $1.13 trillion in credit card debt – and those payments have increased over the past two years – the inflation data do not capture the additional pressure that you are feeling.

The paper advances alternative measures of inflation that include borrowing costs, which they say can explain the gap in the economic data and consumer sentiment.

Wonky, but interesting... and the best explanation that I have seen to explain the disconnect between sentiment and economic data.

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(Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com)

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