CPI And PCE: Two Measures Of Inflation And Fed Policy

PCE and CPI: A Side-by-Side Comparison

This close-up comparison gives us clues as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is considerably less volatile than CPI. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that in the past the less volatile Core PCE has been their metric of choice. On the other hand, the disinflationary trend in Core PCE casts doubt on the effectiveness of the Fed's monetary policy.

The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.

CPI PCE Core Comparison since 2000

Here is an illustration of the spread between the two core metrics since 1960 through the latest month when both indicators have been published.

Here is a long-term perspective from the actual beginnings of the two series.

CPI PCE Core Comparison

Here is a chart that helps us compare the cumulative change in the two indexes since 1960. Over time, the PCE price index reflects significantly lower growth in inflation than does CPI.

CPI PCE Core Cumulative Change

For some technical data explaining the differences between the calculation of PCE and CPI, see this comparison article from the BEA.

In the real world, we can't exclude food and energy from our monthly expenses. But the extreme volatility of these two expense categories, especially energy, often obscures the underlying trend, which is the focus of the chart above. For evidence of the volatility, see this overlay of headline and core CPI and this one of headline and core PCE.

Hostility Toward Government Inflation Analysis

On the other hand, the volatile price of gasoline explains why so many people are confused by the exclusion of food and energy from core measures of inflation. The chart of gasoline prices below is based on the latest weekly data from the Energy Information Administration.

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Disclosure: None.

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