Inflation Metrics: CPI, Core CPI, and PCE
Why Multiple Inflation Measures Exist
Inflation measures the rate at which prices rise across the economy. But there is no single perfect measure—different indexes use different methodologies, basket weights, and data sources. Understanding these differences helps you interpret headlines correctly and anticipate Fed policy.
The three main measures:
- CPI (Consumer Price Index): Published by the Bureau of Labor Statistics (BLS)
- Core CPI: CPI excluding food and energy
- PCE (Personal Consumption Expenditures Price Index): Published by the Bureau of Economic Analysis (BEA)
CPI: The Headline Number
The Consumer Price Index tracks price changes for a fixed basket of goods and services purchased by urban consumers. The BLS surveys approximately 80,000 items across 23,000 retail establishments monthly.
| Component | CPI Weight (2024) |
|---|---|
| Housing (shelter) | ~36% |
| Transportation | ~16% |
| Food | ~13% |
| Medical care | ~8% |
| Energy | ~7% |
| Other | ~20% |
The calculation: CPI = (Cost of basket in current period / Cost of basket in base period) x 100
Worked example: If the reference basket cost ,000 in the base period and ,032 today, the index is 103.2. The year-over-year inflation rate compares this month's index to 12 months ago.
Core CPI: Stripping Out Volatility
Core CPI excludes food and energy prices because these categories experience large short-term swings driven by weather, geopolitics, and commodity markets.
Why it matters: A hurricane disrupting Gulf Coast refineries can spike energy prices 20% in a month. This volatility does not reflect underlying inflationary pressures in the economy.
The trade-off: Core CPI provides a cleaner signal of trend inflation, but food and energy costs genuinely affect household budgets. Neither measure is more correct—they answer different questions.
Historical comparison (2022):
- Headline CPI peaked at 9.1% year-over-year in June 2022
- Core CPI peaked at 6.6% in September 2022
The gap reflected surging gasoline prices from the Ukraine conflict.
PCE: The Fed's Preferred Measure
The Personal Consumption Expenditures Price Index differs from CPI in several important ways:
| Dimension | CPI | PCE |
|---|---|---|
| Publisher | BLS | BEA |
| Basket weights | Fixed | Substitution-adjusted |
| Coverage | Urban consumers | All consumers |
| Medical care weighting | ~8% | ~17% |
| Shelter weighting | ~36% | ~15% |
The point is: PCE allows for substitution—if beef prices rise, consumers may buy more chicken, and the PCE basket adjusts. CPI measures the price of a fixed basket regardless of behavioral changes.
Why the Fed prefers PCE:
- Broader population coverage
- Substitution effects captured
- More comprehensive medical care coverage (includes employer-paid health insurance)
- Tends to run 0.3-0.5 percentage points lower than CPI historically
Core PCE: The Policy Target
The Federal Reserve's 2% inflation target is defined in terms of Core PCE—the PCE index excluding food and energy.
Worked example: If headline PCE is running at 2.5% and Core PCE is at 2.8%, the Fed focuses on the 2.8% figure for policy decisions. Lower food and energy prices do not signal mission accomplished.
Release timing: PCE data comes out about two weeks after CPI, as part of the Personal Income and Outlays report.
Comparing the Measures in Practice
| Measure | Best For | Limitation |
|---|---|---|
| Headline CPI | Consumer budgeting, COLA adjustments | Volatile month-to-month |
| Core CPI | Trend inflation signal | Ignores real household costs |
| Headline PCE | Broad economic coverage | Less timely than CPI |
| Core PCE | Fed policy analysis | Lower housing weight may understate shelter inflation |
Common Pitfalls
- Using CPI to predict Fed moves: The Fed targets PCE, not CPI. A 0.3% CPI/PCE gap matters at the margin
- Ignoring shelter lags: Both CPI and PCE measure shelter costs with 12-18 month lags due to how rental surveys work
- Mixing annualized and year-over-year rates: Monthly releases often highlight month-over-month changes annualized—these are not year-over-year rates
- Confusing price levels with inflation rates: Prices can stop rising (0% inflation) while remaining high
How Professionals Use These Metrics
Bond traders: Watch month-over-month changes in core measures for duration positioning. An above-consensus print typically pressures bond prices.
Equity analysts: Focus on whether input costs are rising faster than companies can pass through to consumers (margin compression risk).
Fed watchers: Track the three-month annualized Core PCE rate for the most current trend signal.
Checklist for Inflation Data Days
Before the release:
- Know consensus expectations for headline and core readings
- Note the prior month's readings and any revisions
- Identify Fed speakers scheduled within 48 hours (reactions often market-moving)
After the release:
- Compare headline vs. core divergence
- Check shelter and medical care components separately
- Calculate three-month annualized rate for trend signal
- Wait for PCE if CPI surprised significantly
Next Step
Create a simple tracking table comparing CPI and PCE readings side-by-side for the past 12 months. Calculate the average gap between the two measures. When the gap widens or narrows significantly from the historical average, investigate which components are driving the divergence.