Everybody is looking at the CPI through the wrong lens. The best measure shows inflation fell to the Fed's target in...

Inflation is slowing, but how much is it slowing?

Thats the big question facing policy makers, investors and consumers.

Unfortunately, the way we talk about the inflation numbers released Thursday can confuse as much as it can clarify. If we focus our attention on how much inflation weve already endured, we may miss clues about how much inflation we have yet to endure, which is the most important question.

Instead of concentrating on the here and now, most reports put the year-on-year inflation rate in the headline.

Not to pick on anyone, but heres how The New York Times reported Thursdays report on the consumer price index: Consumer prices rose 8.2 percent in the year through September, in a report that dashes hopes that inflation in the U.S. may be slowing down.

Thats not wrong, but its seriously misleading. Ill show you a more useful way to think about the numbers.

“ The Fed has actually hit its 2% target over the past three months, but of course the Fed is concerned that inflation could accelerate from here, especially in the hugely important shelter category, where hot inflation for the next year or so is baked into the cake. ”

Making sense of economic data is often a matter of finding the right context, which means the first thing you should do is ask yourself how you want to make use of the data. There are several correct ways of displaying the data, but some are better than others at answering specific questions.

Whats inflation done over the longer run?

For instance, if we want to know how much inflation weve already endured, it might be best to look at the year-on-year increase in the CPI. (The same logic in this column applies to the Feds preferred measure, the personal consumption expenditure price index.) We would compare current prices with prices a year earlier. This may be the most common way the CPI is reported in the media right now, because it puts the intensity and persistence of inflation into a perspective that readers can relate to.