Defined Benefit
Defined Contribution
Insurance Assets

PCE and CPI: What’s the Difference?

PCE and CPI: What’s the Difference?
2 min 51 sec

By any measure, inflation is at historic highs in the United States. Its seemingly relentless rise has been stoked by strong consumer demand fueled by low interest rates and government stimulus; supply-chain disruptions; and higher food, energy, and commodity prices stemming from Russia’s invasion of Ukraine. The cost of shelter has also had a significant effect on inflation more recently. Finally, wage increases, which have been spurred by the strong job market, are reflected in the prices of goods and services and are thus another driver of inflation.

But there are actually two primary measures of inflation: the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). What are the differences between the two? Why does the Fed prefer one over the other? And what are some of the issues that may drive future inflation increases?

The CPI is released by the Bureau of Labor Statistics (see here for details and the latest release), and the PCE is issued by the Bureau of Economic Analysis (here for details). While both measure inflation based on a basket of goods, there are subtle differences between the indices:

  • Sources of data: The CPI uses data from household surveys; the PCE uses data from the gross domestic product report and from suppliers. In addition, the PCE measures goods and services bought by all U.S. households and nonprofits. The CPI only accounts for all urban households.
  • Coverage: The CPI only covers out-of-pocket expenditures on goods and services purchased. It excludes other expenditures that are not paid for directly (e.g., medical care paid for by employer-provided insurance, Medicare, or Medicaid). These are included in the PCE.
  • Formulas: The CPI formula is more likely to be affected by categories with wide price swings such as computers and gasoline. The PCE calculations smooth out these price swings, which makes the PCE less volatile than the CPI.

In January 2023, the BLS plans to start updating weights for the CPI annually based on consumer expenditure data from a single year. This reflects a change from the prior practice of updating weights every two years using two years of expenditure data.

cpi vs pce

In January 2012, the Federal Reserve announced that it would use the PCE as its primary measure of inflation, preferring it for three primary reasons:

  • The expenditure weights in the PCE can change as people substitute away from some goods and services toward others. Thus, if the price of bread goes up, people buy less bread, and the PCE uses a new basket of goods that accounts for people buying less bread. The CPI, however, is less fluid in response to changing consumer preferences.
  • The PCE includes more comprehensive coverage of goods and services.
  • PCE data can be revised more extensively than the CPI, which can only be adjusted for seasonal factors and only for the previous five years.

Markets are worried about inflation because its current level is well above the Federal Reserve’s long-run inflation rate objective of 2% (on the core PCE Index, which excludes volatile fuel and energy prices). It has also been more persistent and broad-based than many expected and has led to an aggressive series of rate hikes by the Fed.

In summary, the CPI represents a basket of goods and services that a consumer would buy without making substitution changes when prices change. The PCE encompasses a broader range of goods and services than the CPI, from a broader range of buyers. It tries to track what is actually purchased, and represents how consumers change their buying patterns when relative prices change. This leads to smoother price changes in the PCE and typically lower levels of reported inflation, at least as experienced by consumers.

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts
Macro Trends

Investors, Be Careful for What You Wish

Jay Kloepfer
Callan expert analyzes the 1Q24 global economy and Federal Reserve policy.
Macro Trends

Are We Headed for an Economic ‘Rapid Unplanned Disassembly’?

Alex Browning
Callan analyst examines the state of the U.S. economy and the prospects for a soft landing.
Macro Trends

Higher for Longer? Rates and the Global Economy

Kristin Bradbury
Callan expert analyzes the global economy in 1Q24.
Macro Trends

The U.S. Economy Is More Surprising by the Quarter

Jay Kloepfer
Jay Kloepfer analyzes the U.S. and global economies in 4Q23 and for the full year.
Macro Trends

Grim Economic Forecasts Successfully Thwarted

Kristin Bradbury
Kristin Bradbury provides an assessment of the global economy in 4Q23.
Macro Trends

Stunning Growth in U.S. Economy as Clouds Loom

Jay Kloepfer
This blog post analyzes the economy in 3Q23.
Macro Trends

The Fed’s Delicate Walk on a Tightrope

Kristin Bradbury
Kristin Bradbury discusses the current macroeconomic situation and the outlook as the Fed "walks a tightrope."
Macro Trends

Is Recession Risk Really Off the Table?

Jay Kloepfer
Jay Kloepfer analyzes the U.S. economy in 2Q23 and the prospects for a recession.
Macro Trends

The Global Economy: Too Good to Be True?

Kristin Bradbury
Kristin Bradbury assesses the global economy in 2Q23 and what it might hold for the rest of the year.
Macro Trends

Higher Interest Rates Work! That’s Good, Right?!

Jay Kloepfer
Jay Kloepfer analyzes the U.S. and global economy in 1Q23 and the outlook for rates, GDP, and inflation.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.