PCE Price Index
What is PCE Price Index?
PCE Price Index figures track prices for the consumption counted in the national accounts, published monthly by the Bureau of Economic Analysis.
PCE Price Index numbers cover what households consume as measured in the national accounts, and the Bureau of Economic Analysis releases them monthly with the personal income and outlays report. Two differences from the consumer price index drive most of the gap between them. The first is weighting: PCE draws on the business surveys behind GDP and counts goods and services bought on households' behalf, such as medical care paid by employers and government programs, which gives health care a much larger share. The second is substitution: PCE uses a chained formula whose weights update every period, so it reflects buyers shifting toward relatively cheaper items, while headline CPI holds its basket weights fixed for longer. Neither is the correct one and the other wrong; they answer different questions, and the Federal Reserve states its inflation goal in PCE terms.
PCE Price Index: a worked example
Suppose medical care prices rise 4 percent over a year while everything else rises 2 percent, and medical care carries a weight of roughly 0.17 in PCE but roughly 0.08 in CPI, because PCE counts care paid by insurers and government. The medical contribution is 0.17 × 4 = 0.68 points in PCE and 0.08 × 4 = 0.32 points in CPI. The rest contributes 0.83 × 2 = 1.66 points and 0.92 × 2 = 1.84 points. Totals are 2.34 percent for PCE and 2.16 percent for CPI. Identical price changes produce different headline rates purely because the weights differ.
The mistake students make with pce price index
Students assume PCE and CPI should give the same inflation rate, and that a difference means one of them is broken. Both are accurate measures of different things: CPI tracks out-of-pocket spending by urban households using weights held fixed for longer, while PCE tracks all consumption in the national accounts with weights that update each period. The gap comes from weighting and substitution treatment, not from measurement error.
PCE Price Index questions
What is the difference between the PCE price index and CPI?
They differ in weights and in how they treat substitution: PCE covers all consumption in the national accounts, including care paid by employers and government, and reweights every period, while CPI covers out-of-pocket urban spending with weights fixed for longer. That makes health care a much bigger share of PCE. The two therefore report slightly different inflation rates for the same price changes.
Why does the Federal Reserve use PCE inflation?
The Federal Reserve states its longer-run inflation goal in PCE terms because the index covers a broader set of consumption and reweights as spending patterns change. It is also revised with the national accounts, so it fits the framework used for the rest of the economy. CPI remains the basis for indexing wages, benefits and inflation-protected bonds.
Is core PCE the same as PCE?
No, core PCE is the same index with food and energy items removed, so it is less affected by swings in fuel and grocery prices. Headline PCE is closer to what households actually experience, while core PCE is used to read the underlying trend. Both appear in the same monthly release.
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