What It Measures
The PCE Price Index measures price changes for personal consumption expenditures, capturing what households actually spend money on. Unlike CPI, PCE:
- Uses a chain-weighted formula that accounts for substitution effects (consumers switching to cheaper alternatives)
- Includes expenditures made on behalf of consumers (e.g., employer-paid health insurance)
- Has broader coverage of goods and services
- Tends to run about 0.3 percentage points below CPI historically
Why It Matters
Fed's Preferred Measure: The Federal Reserve officially targets 2% PCE inflation, not CPI.More Comprehensive: Captures spending patterns more accurately than CPI.Policy Guidance: FOMC statements and projections reference PCE inflation.Less Volatile: Generally shows smaller swings than CPI.
How to Interpret
Core PCE: Like core CPI, excludes food and energy. This is the Fed's primary inflation gauge.PCE vs CPI Gap: If PCE runs significantly below CPI, consumers may be successfully substituting to cheaper goods.Services vs Goods: Track the breakdown to understand inflation dynamics.
Key Levels to Watch
| Level | Interpretation |
|---|---|
| Below 2% | Below Fed target |
| 2-2.5% | At or near target |
| 2.5-3% | Moderately above target |
| Above 3% | Significantly above target, hawkish Fed |