CPI vs. PCE: Insight into inflation

A tale of two indexes.

The U.S. government compiles data for two separate indexes to track inflation. The consumer-price index (CPI) measures the average change over time in the prices paid by U.S. consumers for a market basket of specific consumer goods and services. The personal-consumer-expenditures price index (PCE) tracks the prices paid for or on behalf of (e.g., medical insurance paid by employers) consumers for a more comprehensive set of goods and services than the CPI.

Inflation is a significant indicator of the health of the U.S. economy. Tracking changes in prices for all products and services in the country would not be feasible, so the U.S. government and economists use two benchmarks that serve as a gauge of inflation: the consumer-price index (CPI) and the personal-consumer-expenditures (PCE) price index.

What are the differences between CPI and PCE?

The CPI tracks the average change over time in the prices that consumers pay for a basket of specific consumer goods and services. The U.S. Department of Labor obtains the CPI information from individual households through its Consumer Expenditure Survey.

The government uses the CPI to calculate adjustments to income requirements for federal assistance programs; cost-of-living increases for social programs such as Social Security, and to determine federal income tax brackets.1

The PCE is a measure of the prices paid for goods and services by or on behalf of (e.g., medical insurance paid by employers, Medicare or Medicaid) U.S. consumers. The Department of Commerce sources the PCE data from a survey of businesses (such as the Census Bureau’s monthly retail surveys) rather than consumers. The index tracks the prices of a more comprehensive set of goods and services than the CPI, which may provide a more accurate gauge of inflationary pressures. Therefore, the PCE is the U.S. Federal Reserve’s preferred measure of inflation.

¹ According to the U.S. Department of Labor, Bureau of Labor Statistics.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding SEI’s portfolios or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

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Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).