What’s the difference between CPI and PCE?
About two-thirds of Americans say their expenses have risen in the past year, but only about a quarter say their income is up, according to new Associated Press poll. That’s how inflation feels to we consumers.
But in terms of measuring inflation with hard numbers, there are few options to choose from. The government released the personal consumption expenditures price index for September on Friday, and it showed inflation clocking in at 3.4% year over year. The guardians of interest rates at the Federal Reserve prefer this index to the other one that gets so many headlines: the consumer price index.
The consumer price index, or the CPI, and the personal consumption expenditures price index, or the PCE, both measure the cost of a basket of goods, but the baskets aren’t the same.
Housing is a much bigger part of the CPI basket. The huge increase in housing costs has been nudging the CPI higher.
Meanwhile, PCE is pushed lower because it accounts for consumer substitutions. For example, if beef prices spike, people may switch to buying chicken.
“That’s going to mean that the shopping cart costs less,” said Claudia Sahm, a former Federal Reserve economist and founder of Sahm Consulting.
Sahm pointed out another difference: The CPI measures what consumers spend. The PCE also looks at what businesses charge for consumer products and services.
Think about health care, Sahm said. There’s your out-of-pocket copay, which the CPI measures. Then there’s “the whole cost of the medical care, whatever is paid by the private insurer, by the government. That’s going to show up in PCE.”
The CPI has been about half a percentage point higher than the PCE, Sahm noted — although the gap is narrowing.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
