The Two Most Important Inflation Indicators in the U.S.: CPI vs. PCE

Controlling inflation is one of the Federal Reserve's dual mandates, and inflation levels are a key factor in monetary policy decisions. The Consumer Price Index (CPI) and Personal Consumption Expenditures Price Index (PCE) are the primary metrics used to gauge inflation, with the Core PCE being the Fed's preferred measure.

PCE Index

The PCE Index tracks price changes in consumer goods and services, similar to CPI. The Core PCE excludes volatile food and energy prices, providing a clearer view of underlying inflation trends.

CPI Index

CPI is the most widely cited inflation indicator. However, in 2000, the Fed shifted its focus from CPI to PCE—the Federal Open Market Committee (FOMC) stopped publishing CPI forecasts and began using PCE for inflation projections.

PCE vs. CPI: Key Differences

1. Scope

   • PCE covers only personal consumption (food/energy make up ~25%), but the Core PCE (excluding these volatile categories) is considered a more stable inflation gauge.

   • Traders closely monitor Core PCE as it is the Fed’s primary inflation benchmark.

2. Calculation

   • CPI measures only out-of-pocket household expenses, while PCE includes all consumption (e.g., employer/government-paid healthcare).

   • PCE accounts for imputed costs (e.g., financial services opportunity costs), which CPI excludes.

   • Housing weight: 15% in PCE vs. 31% in CPI.

3. Why the Fed Prefers PCE
   The Fed favors PCE because:

   • Its expenditure composition better reflects real consumer behavior.

   • It has broader coverage.

   • It can be revised with improved methodologies.