After three hotter-than-expected CPI reports to start the year, investors will closely watch PCE data in the coming months. CPI inflation generally runs about 0.4 percentage points higher than PCE inflation. However, at its peak in the summer of 2022, CPI inflation was almost 2 full percentage points higher than PCE inflation (9.0% vs. 7.1%). The “wedge” between the two indexes narrowed in the second half of 2023 as inflation fell dramatically, but it has since widened again to an average of 0.7 percentage points in December, January, and February.
Which Is Better PCE or CPI?
There are other measures of consumer price inflation that either provide alternatives to or a different focus than those previously discussed. Research from the Cleveland Fed shows that the median PCE inflation rate can be useful for estimating the underlying trend in inflation and forecasting future inflation. Annual core PCE inflation in April also remained unchanged from March’s adjusted reading of +2.8% year over year. The Fed uses the core PCE price index as its preferred measure of U.S. inflation. According to her, the PCE is a broader and timelier measure of consumer behavior than the CPI, and that’s why the Fed prefers it.
Underlying measures of CPI inflation
Because this isn’t based on real consumer supply and demand, it doesn’t necessarily reflect inflation in the real economy. That’s why economists often turn to core measures of inflation instead, which rise much more stably. The most recent PCE price index data was released on May 31, covering the month of April. The headline April PCE inflation figure was +2.7% year over year, unchanged from the annual rate of +2.7% in March. Although there was no change, generally, PCE inflation has been trending downward since the most recent peak rate of +6.8% in June 2022. Prices for goods and services change constantly, rising and falling as companies and consumers react to trends in the economy.
Differences between the CPI and the PCE price index
As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world’s major financial publications, including Kiplinger, U.S. News and World Report, The Motley Fool and more. Michael holds a master’s degree in philosophy from The New School for Social Research and an additional master’s degree in Asian classics from St. John’s College. CPI and the PCE index both measure U.S. inflation in similar but ultimately different ways.
The PCE price index is used primarily for macroeconomic analysis and forecasting. Among core goods, the price index for other recreational vehicles (down an annualized 24.7 percent) had the largest negative impact, subtracting about 0.1 annualized percentage points from December’s core rate. At the other end of the spectrum, the price index for used light trucks (up an annualized 45.7 percent) had the largest positive impact, contributing about 0.6 annualized percentage points to December’s core rate. Personal consumption expenditures, or PCE, allows economists, consumers, and businesses to see how well the economy is faring from month to month. PCE data may reflect measurement errors that occur during collection and in source data provided to the BEA.
Inflation is top of mind for investors, but there’s more than one way to measure consumer prices. Core PCE inflation plays an important role in the U.S. financial system because the Federal Reserve references it to gauge U.S. inflation when setting monetary policy. The chart below breaks down the differences between https://www.1investing.in/ the CPI and PCE into these four effects for each quarter starting in 2007. The largest difference tends to be the weight effect, which contributes to bigger changes in the CPI, while the scope effect tends to lessen the difference. PCE inflation is released a few weeks later, so is often less of a surprise as PPI.
- The PCE price index, released each month in the Personal Income and Outlays report, reflects changes in the prices of goods and services purchased by consumers in the United States.
- For details, refer to Information on 2024 Annual Updates to the National, Industry, and State and Local Economic Accounts.
- It includes a broader subset of goods and services prices, as well as spending from both rural and urban consumers.
- The most recent PCE price index data was released on May 31, covering the month of April.
The PCE price index, released each month in the Personal Income and Outlays report, reflects changes in the prices of goods and services purchased by consumers in the United States. That index — which ticked up 6.6% in March from a year earlier, 5.2% excluding food and energy — is put out by the Bureau of Economic Analysis. “That’s the interest coverage ratio upsc primary inflation measure that the Fed is using to make monetary policy decisions,” said Julie Smith, an economics professor at Lafayette College. The $57.6 billion increase in current-dollar PCE in June reflected an increase of $53.1 billion in spending for services and an increase of $4.5 billion in spending for goods (table 2).
In the United States, employer health insurance is a large component and accounts for much of the difference in weights. A variation is the personal consumption expenditures price index, excluding food and energy, also known as the core PCE price index. The core index makes it easier to see the underlying inflation trend by excluding two categories – food and energy – where prices tend to swing up and down more dramatically and more often than other prices.
This is referred to as the formula effect, because the indexes themselves are calculated using different formulae. The details can get quite complicated, but the gist of the matter is that the PCE tries to account for substitution between goods when one good gets more expensive. 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 uses the same basket as before (again, roughly; the details get complicated). Another aspect of the baskets that leads to differences is referred to as coverage or scope. The CPI only covers out-of-pocket expenditures on goods and services purchased. It excludes other expenditures that are not paid for directly, for example, medical care paid for by employer-provided insurance, Medicare, and Medicaid.
The price index for energy goods and services as a whole was up 29.9 percent over the 12 months. The 12-month trimmed mean inflation rate was 3.0 percent in December, up from 2.9 percent in November. The 12-month inflation rate for headline PCE was 5.8 percent, up from 5.7 percent in November, while the 12-month inflation rate for PCE excluding food and energy was 4.9 percent, versus 4.7 percent a month earlier. The comparisons in the table above will vary over time as the relative weights of the components of the indexes change. Personal consumption expenditures and the PCE Price Index are two different measurements. PCE measures consumer spending on goods and services, while the PCEPI measures the prices of those goods and services.
Second, the weights in the PCE are updated more frequently and can better account for consumer substitution. The prices you pay for goods and services change all the time – moving at different rates and even in different directions. A price index is a way of looking beyond individual price tags to measure overall inflation (or deflation) for a group of goods and services over time. The price index for food and beverages purchased for off-premises consumption rose at a 3.9 percent annualized rate in December after increasing at an 8.3 percent rate in November. The increase in the aggregate reflects a large increase in the prices of more-processed food items (up an annualized 5.9 percent) and a slight decline in the prices of less-processed food items (down an annualized 0.9 percent). The price index for gasoline and other motor fuel fell a seasonally adjusted 0.5 percent in December after rising 6.1 percent in November.
