What is the PCE price index?

The Personal Consumption Expenditures (PCE) price index is a measure of price changes for goods and services consumed by households in the United States. Published monthly by the Bureau of Economic Analysis (BEA), it is the Federal Reserve's officially preferred measure of inflation and the basis for its 2% inflation target.

PCE differs from CPI in several important ways. First, PCE uses a chain-weighted methodology that accounts for consumer substitution, meaning when beef prices rise and consumers shift to chicken, the PCE weight adjusts to reflect actual spending patterns. CPI uses a fixed-weight basket that only updates periodically. This makes PCE generally lower and less volatile than CPI.

Second, PCE captures a broader range of spending. While CPI measures only out-of-pocket consumer spending, PCE includes spending by employers on behalf of consumers (such as employer-paid health insurance premiums) and spending by nonprofit institutions serving households. As a result, PCE assigns a lower weight to shelter and a higher weight to healthcare than CPI does.

The core PCE deflator (excluding food and energy) is the specific measure the Fed targets at 2%. It has been the centerpiece of every Fed communication about inflation since the explicit inflation targeting framework was adopted in 2012. When Fed officials say they want to see "convincing evidence that inflation is moving sustainably toward 2%," they mean core PCE.

Because PCE data is released about two weeks after the corresponding CPI report, markets tend to react more to CPI (which comes first and is highly correlated). However, discrepancies between CPI and PCE trends can be analytically important. If CPI is running well above PCE, it may indicate that the housing weight in CPI is distorting the picture, and the Fed may look through the higher headline number when setting policy.