CPI vs. PCE Inflation: What Is the Difference?

Two Different Agencies, Two Different Purposes

The Consumer Price Index is produced monthly by the Bureau of Labor Statistics and measures the average change in prices paid by urban consumers for a basket of goods and services, with the basket derived from a survey of what households report spending. The Personal Consumption Expenditures price index is produced by the Bureau of Economic Analysis as part of the national income and product accounts, and it deflates the consumption component of GDP. Because they were built for different jobs — the CPI as a cost-of-living escalator, the PCE as a national accounting deflator — they differ in scope, in weighting method, and in how they treat substitution, and they routinely print different numbers for the same month.

The Formula Difference

The CPI is built on a largely fixed basket, a Laspeyres-type index that asks what it would cost today to buy the quantities households bought in an earlier reference period. Weights are updated periodically rather than continuously. The PCE price index uses a chained Fisher-ideal formula that updates weights every period, which means it captures substitution: when beef prices jump and shoppers buy more chicken, the PCE reflects the shift almost immediately while the CPI does so only when the basket is refreshed. Because consumers substitute away from what has become expensive, this alone tends to make CPI inflation print somewhat higher than PCE inflation over time.

The Scope and Weight Differences

The two indexes cover different things. The CPI measures out-of-pocket spending by urban households. The PCE measures all consumption on behalf of households, which includes items households do not pay for directly — most importantly, medical care paid by employers and by government programmes. That is why healthcare carries a much heavier weight in the PCE. Housing runs the other way: shelter is roughly a third of the CPI but a considerably smaller share of the PCE, so a housing-driven inflation episode shows up more dramatically in the CPI. The weight differences, not just the formula, explain much of the observed gap between the two series in any given month.

Why the Fed Targets PCE

The Federal Reserve announced in 2000 that it would emphasise the PCE price index in its published projections, and the January 2012 statement made the 2 percent objective explicitly a PCE target. The stated reasons were that the PCE covers a broader range of consumption, that its weights update continuously and therefore reflect actual spending patterns as they change, and that its historical data are revised as better source information becomes available rather than being frozen. The trade-off is that PCE data arrive slightly later than CPI data and are subject to revision, while the CPI is published earlier and is not revised — which is why the CPI remains the index used for Social Security cost-of-living adjustments and for inflation-protected Treasury securities.

Headline vs. Core in Both Measures

Both indexes are published in a headline version covering everything and a core version excluding food and energy. The exclusion is not a claim that food and fuel do not matter; it is a statistical judgement that those two categories are volatile enough to obscure the underlying trend that monetary policy can actually influence. Officials therefore watch core measures as a guide to where headline inflation is heading, while the formal 2 percent objective is defined on headline PCE. On an exam or in a news story, the safest habit is to check three things before comparing any two inflation figures: which index, headline or core, and whether the number is a monthly change or a change from twelve months earlier.