CPI vs PCE: two ways to measure inflation
CPI grabs the headlines. PCE is the one the Fed actually targets. They measure the same thing in different ways, and the gap between them is worth knowing.
The short answer
The CPI (Consumer Price Index) tracks the prices urban consumers pay for a basket of goods and services. The Bureau of Labor Statistics (BLS) publishes it monthly.
The PCE price index (Personal Consumption Expenditures) tracks prices of a wider range of spending, including things paid for on people's behalf. The Bureau of Economic Analysis (BEA) publishes it monthly.
The Federal Reserve's 2% inflation goal is measured with PCE. Markets often react more to CPI, because it comes out first.
Side by side
| CPI | PCE price index | |
|---|---|---|
| Published by | BLS | BEA |
| Release | Monthly, 8:30 am ET, usually mid-month | Monthly, 8:30 am ET, usually near month-end, in the Personal Income and Outlays report |
| What it covers | What urban consumers pay out of pocket | All personal spending, including some paid on people's behalf |
| Health care weight | Smaller (out-of-pocket only) | Larger (includes employer and government-paid care) |
| Housing weight | Larger | Smaller |
| Basket updates | Fixed weights, updated periodically | Weights shift as spending shifts |
| Usual reading | Tends to run a bit higher | Tends to run a bit lower |
| Fed target? | No | Yes, 2% |
| "Core" version | Excludes food and energy | Excludes food and energy |
Why PCE usually reads lower
Three main reasons:
- Different weights. Housing costs are a bigger slice of CPI. When rents rise fast, CPI rises more.
- Wider scope. PCE counts spending people don't pay directly, like employer-paid health insurance.
- Substitution. If beef gets pricey and people buy chicken instead, PCE's formula picks up that switch faster. CPI's basket is slower to change.
The gap is often a few tenths of a percentage point, but it changes over time.
CPI: why markets watch it
- It's first. CPI usually lands about two weeks before PCE for the same month, so it carries the surprise.
- It's famous. Pay raises, Social Security adjustments and many contracts reference it.
- It moves fast markets. Index futures, Treasury yields, the dollar and gold can jump at 8:30 am ET. See CPI report explained.
PCE: why the Fed watches it
- Broader picture. It covers more of what the economy actually spends.
- It's the target. The Fed set 2% PCE inflation as its longer-run goal in 2012.
- Less surprise. Much of PCE can be estimated from CPI and producer price data, so the market reaction is often smaller. See PCE inflation explained.
Watch "core" more than "headline". Food and energy prices jump around. Core numbers strip them out, and the Fed often talks about core PCE when it describes the trend.
Which fits you?
You don't pick one. You plan for both on the calendar:
- CPI day: expect bigger moves at 8:30 am ET. Many beginners are flat before the release and wait 15 to 30 minutes after.
- PCE day: often calmer, but not always. Check the calendar and the forecast.
- FOMC week: both reports feed what the Fed says. See CPI and FOMC days.
Markets react to the surprise: the actual number compared with the forecast. See how to read an economic calendar.
Common mistakes
- Comparing CPI to the Fed's 2% target directly. The target is PCE, which usually runs a bit lower.
- Watching the headline only. Core often matters more to rate expectations.
- Trading the first spike. The first move after 8:30 am ET can reverse. Spreads are often wide.
- Big size on data days. If you do trade, size from a wider stop with the position size calculator.
Questions
What is the difference between CPI and PCE?
CPI is published by the BLS and tracks what urban consumers pay out of pocket. PCE is published by the BEA and covers a wider range of spending, with different weights and a formula that adjusts as people switch products. PCE usually reads a bit lower.
Why does the Fed use PCE instead of CPI?
The Fed sees PCE as a broader, more complete picture of consumer spending, and its weights adjust as habits change. Its 2% longer-run inflation goal is stated in PCE terms.
What time is the PCE report released?
The BEA usually releases it at 8:30 am ET near the end of the month, as part of the Personal Income and Outlays report. Check the BEA schedule for exact dates.
Does CPI or PCE move the market more?
CPI usually moves markets more because it comes out first and carries the surprise. By PCE day, much of the number can already be estimated.
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