In the United States, the two most widely followed measures of consumer prices are the consumer price index (CPI) and the personal consumption expenditures (PCE) price index. Both indexes combine the prices of a “basket” of goods and services to derive an index that can then be used to measure total or “aggregate” inflation. However, these two indexes are constructed differently and can behave differently. We discuss some of the differences in detail below. For explanations of many concepts here, such as aggregate and underlying inflation, see our Inflation 101 section.
The CPI is used to measure the change in the out-of-pocket expenditures of all urban households for a particular set of goods and services. In terms of its coverage, the CPI measures the cost of spending made directly by households for the items in its basket, with the notable exception that it also includes a measure of the rents that homeowners implicitly pay instead of renting their home. The CPI is constructed by the Bureau of Labor Statistics and is released around the middle of each month, with a one-month publication lag. More detailed information on the CPI is available in this slideshow.
The PCE price index measures the change in the prices of goods and services consumed by all households and nonprofit institutions serving households. Compared with the CPI, the PCE price index has broader coverage because it includes spending made directly by or on behalf of households, and it includes a broader range of nonmarket prices for goods and services for which households receive some benefit. The PCE price index is constructed by the Bureau of Economic Analysis and is released toward the end of each month, with a one-month publication lag. More detailed information on the PCE index is available in this slideshow.
While the CPI and PCE price index both provide measures of how prices are changing over time, they are not constructed in the same way. One difference is the smaller number of items in the basket of the CPI. The CPI reflects out-of-pocket expenditures of all urban households, while the PCE price index also includes goods and services purchased on behalf of households. In the case of medical care outlays, for example, the PCE price index would not only include the out-of-pocket expenses paid for by households, but also the medical care services paid for by an employer and by the government. Another difference is the expenditure weights assigned to each of the CPI and PCE categories of items. Part of the reason for the different weights reflects the different coverage of the indexes—there are items in the PCE price index that are not in the CPI. In addition, the indexes use different data sources for the weights, with the weights in the PCE price index updated more frequently depending on changes in households’ spending patterns. There are other differences that include the source(s) used for an item’s price and seasonal adjustment procedures. Taken together, the differences in the two indexes result in CPI inflation readings that are generally higher than PCE inflation readings as shown in the chart for the 1995–2016 period.
To see more recent data and plot other inflation series, visit the Inflation Charting section.
The PCE price index has several advantages over the CPI that include its ability to capture the changing composition of spending that is more consistent with consumer behavior (including consumers’ substitution toward relatively cheaper items), as well as weights that are based on a more comprehensive measure of expenditure. One drawback of the PCE price index, however, is that it can be substantially revised, while the (non-seasonally adjusted) CPI is never revised. This could give an edge to the CPI for some purposes (e.g., contract indexation) and also explains its use for Treasury Inflation-Protected Securities (TIPS).
A more detailed discussion of the differences between the CPI and PCE price index can be found in this Cleveland Fed Economic Trends.
Inflation rates tend to exhibit both temporary and persistent movements. Because economists often are interested in the persistent movements in inflation, they have proposed a number of measures to capture this particular component, which can be thought of as the inflation trend or underlying inflation. Three of the best-known measures of underlying inflation are median inflation, trimmed mean inflation, and core inflation (all items excluding food and energy). All start with an aggregate price index such as the CPI or PCE price index, and then adjustments are made to remove transitory changes in the index (“noise”), so that a measure of the underlying (persistent) component of inflation can be calculated.
The median and trimmed mean are based on the same notion that the source of the noise in the price data is the lowest and highest price changes in the basket. The difference between the median and trimmed mean is the location of the cutoffs for the lowest and highest price changes to be excluded from the index. The core measure is based on the idea that the source of the noise in the price data is associated with particular items.
Some of the underlying measures of CPI inflation have analogs for PCE inflation.
There are other measures of consumer price inflation that either provide alternatives to or a different focus than those previously discussed.