CPI vs PCE: How the Two Inflation Measures Differ
The United States publishes two headline inflation measures. The consumer price index gets the news coverage; the personal consumption expenditures price index is what the Federal Reserve actually targets. They usually tell a similar story, but not an identical one, and the gap matters when interest rate decisions are being made.
Side by side
| CPI | PCE | |
|---|---|---|
| Published by | Bureau of Labor Statistics | Bureau of Economic Analysis |
| What it covers | Out-of-pocket spending by urban households | All consumption, including items paid on a household's behalf |
| Basket weights | Updated on a fixed schedule | Updated continuously as spending shifts |
| Healthcare treatment | Only what households pay directly | Includes employer and government-funded care |
| Typical level | Slightly higher | Slightly lower |
| Used for | Social Security COLA, contracts, TIPS | The Federal Reserve's 2% target |
Why PCE usually runs lower
Two reasons dominate. First, PCE weights adjust as consumers substitute towards cheaper alternatives, while CPI holds its basket fixed for longer, so CPI captures more of the price rise and less of the behavioural response. Second, PCE has a much larger healthcare component because it counts care paid for by employers and government, and those prices have often risen more slowly than the out-of-pocket costs CPI measures.
Which one should you use
For anything contractual, use whichever index the document names, which in practice is almost always CPI. For understanding what the Federal Reserve is likely to do next, watch core PCE. For adjusting a historical dollar amount into today's money, CPI is the conventional choice and the one this site's calculators use.
Frequently asked questions
Why does the Fed prefer PCE?
Because its weights update continuously and its coverage of consumption is broader, the Fed regards it as a more complete picture of how prices facing households are actually changing.
How big is the gap?
Historically PCE has tended to run a few tenths of a percentage point below CPI, though the gap widens and narrows depending on which categories are driving inflation at the time.