CPI vs Core PCE

The Consumer Price Index (CPI) is published monthly by the Bureau of Labor Statistics. It measures the average change over time in prices paid by urban consumers for a market basket of goods and services. CPI is the headline inflation number covered by financial media, and it is the inflation measure used to adjust Social Security benefits, index tax brackets, and set TIPS (Treasury Inflation-Protected Securities) payouts.

The Personal Consumption Expenditures (PCE) price index is published monthly by the Bureau of Economic Analysis. It measures price changes in personal consumption expenditures across a broader definition of consumer spending that includes items paid by others on consumers' behalf, such as employer-provided health insurance and Medicare. PCE is the Federal Reserve's preferred inflation measure and the series the FOMC targets at 2 percent. The Fed specifically targets Core PCE, which excludes food and energy prices, to focus on underlying inflation trends.

CPI is limited to out-of-pocket spending by urban households. It excludes rural households, institutional populations, and spending paid by someone other than the consumer directly. Urban consumers represent approximately 93 percent of the US population, so the exclusion is small but real.

PCE captures a much broader scope: all personal consumption expenditures in the National Income and Product Accounts, regardless of who paid. This includes employer-paid health insurance premiums, Medicare benefits received by seniors, Medicaid benefits, and imputed financial services. Healthcare is the single largest area where the two measures differ, because employer and government healthcare spending is about three times larger than out-of-pocket healthcare spending. CPI weights healthcare at roughly 8 percent of the basket; PCE weights it at about 17 percent.