Consumer spending is one of the biggest drivers of the U.S. economy so policymakers are always on the lookout for anything that might affect that behavior, such as rising prices. Headlines consistently comment on the Consumer Price Index (CPI) as a gauge of inflation, but it isn’t the only indicator that can be used in that way. In fact, the Personal Consumption Expenditures Price Index (PCEPI) is the preferred inflation gauge of the U.S. Federal Reserve when making monetary policy decisions, in other words, changes to interest rates, rather than the CPI.
Here’s why.
PCEPI vs. CPI
While the CPI is produced by the Bureau of Labor Statistics (BLS), the PCEPI comes from the Bureau of Economic Analysis (BEA). According to their website, the PCEPI is a “measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services.” It is important to note that this index does not include final goods and services that are bought by businesses or the government, or those that are exported from the U.S.
The Federal Reserves prefers the PCEPI because of these three key differences:
Consumption substitutes: The CPI is based on a fixed basket of goods and although it is updated regularly, it struggles to account for the more frequent changes in consumer behavior that can occur because of price fluctuations. Say for example, when the price of eggs increases, consumers likely will buy fewer eggs and more of some other breakfast item. The PCEPI is better at reflecting these short-term changes.
Scope and coverage: The CPI looks at out-of-pocket spending, but cannot account for expenses that are paid for indirectly on the behalf of consumers, such as employee-covered health insurance. The PCEPI is able to include these types of expenses in its calculation in order to examine a broader consumer cost ecosystem.
Adjusting historical data: The method of calculating the CPI has changed over time, which means the BLS is not able to reflect those changes on historical data. Therefore, once published, CPI data is not revised. Alternatively, PCEPI data is able to apply changes in methodology to historical data.
Some other key differences to note
Data sources: The CPI uses data from household surveys within urban communities on what consumers say they are spending, while the PCEPI uses data from gross domestic product reports along with surveys from suppliers, which means that the CPI does not account for rural consumers. The PCEPI, on the other hand, receives its data from the gross domestic product report and suppliers, allowing it to cover all U.S. households.
Formula: The way the CPI is calculated makes it susceptible to large price swings in certain items, while the PCEPI accounts for those swings and adjusts, making PCEPI a less volatile index.
If you are interested in understanding more about the specifics of the differences between CPI and PCEPI, check out this detailed report by the BLS that explains.
Other things to know about the PCEPI
- The Federal Reserve adopted the PCEPI as its primary indicator in 2012.
- The BEA also produces the Core PCE Price Index, which excludes data for food and energy which are seen as the most violate categories.
- The committee that makes these monetary decisions is the Federal Open Market Committee, which meets eight times a year. Their next meeting is May 2-3.
- Although the Federal Reserve prefers the PCEPI, it does not mean that it does not take into account other factors or indexes while making monetary decisions.
