A Comparison of PCE and CPI: Methodological Differences in U.S. Inflation Calculation and Their Implications

Noah Johnson

Abstract

Inflation is a key economic indicator reflecting the health of an economy. Its impact on measuring economic health is amplified by its use as an adjustment to other economic variables, including real GDP and real wage growth. The Consumer Price Index (CPI) and Personal Consumption Expenditures Price Index (PCE) are two U.S. inflation metrics that use different methodologies, and therefore produce different estimates. The differences can be grouped into four effects: formula, weight, scope, and 'other.' This research evaluates two effects, weight and scope, and discusses their implications. The weight effect is a result of differences in how consumer expenditure data are sourced. CPI sources data from consumers, while PCE sources from businesses. The scope effect is a result of the different types of expenditures CPI and PCE track. For example, CPI only tracks out-of-pocket consumer medical expenditures, but PCE also tracks expenditures made for consumers, thus including employer contributions. The implications of these differences are considerable. Many contracts and government programs are tied to inflation, from rental agreements to social security.