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Like the headline measures, core CPI tends to show higher inflation than core PCE. Since 2000, core CPI has averaged annual increases of 3.9 percent, and core PCE has averaged 3.4 percent, the same half a percentage point difference as between the headline numbers.
Core inflation is measured by both the CPI and the core personal consumption expenditures (PCE) index. The PCE represents the prices of goods and services purchased by consumers in the U.S.
We explain how measures of consumer prices are computed and what the differences are between the consumer price index (CPI) and the personal consumption expenditures (PCE) price index.
The goal of this note is to provide an assessment of two of the most commonly used indicators of core inflation: the PCE price index excluding food and energy (an exclusion index), and the Dallas Fed trimmed mean PCE price index (a central-tendency statistical measure).
Why does the Fed target PCE inflation instead of the CPI? To measure inflation across the entire economy, economists produce price indexes to see how overall prices for goods and services are changing.
Core PCE inflation, which leaves out food and gas prices, rose 0.1 percent monthly and 3.9 percent year-over-year. The CEA discussed the highlights of the report in our X thread, as usual,...
Prices included in the PCE category “food services and accommodations” are not included in the “food” price index because these services prices tend to be far less volatile than those for food commodities such as meats, fresh vegetables and fruits.
The core index makes it easier to see the underlying inflation trend by excluding two categories – food and energy – where prices tend to swing up and down more dramatically and more often than other prices.
This measure is based on Personal Consumption Expenditures (PCE), which is the component of GDP that includes all consumer spending on durable goods, nondurable goods, and services. To illustrate the important difference between PCE and “core” PCE, the two inflation measures are displayed in Chart 2.
Each measure is color-coded (in 25-basis-point increments) relative to its price stability target. The section next to it shows the average differences between each measure of underlying inflation and core PCE, as well as the targets for each measure based on that difference and the core PCE target of 2 percent.