PCE vs. CPI
Both measure inflation, but PCE differs:
- PCE accounts for consumer substitution (when beef prices rise, consumers buy chicken)
- CPI treats categories more rigidly
- PCE covers broader spending categories
- PCE typically runs 0.3-0.5 percentage points below CPI
In 2024:
- CPI: 3.2%
- PCE: 2.8-2.9%
The Fed's Target
The Fed defines its 2% inflation target in PCE terms, not CPI. When the Fed says "inflation is above target," they mean core PCE is above 2%.
If core CPI is 3% but core PCE is 2.3%, the Fed views inflation as closer to target (using PCE) than headlines suggest (using CPI).
Investor Implications
Understanding the difference prevents confusion. A headline saying "inflation hit 3.2%!" (CPI) might still be moderate when viewed through PCE (2.8%), the lens the Fed actually uses for policy.
