What Is PCE?

Personal Consumption Expenditures (PCE) is the Federal Reserve's preferred inflation measure, published monthly by the Bureau of Economic Analysis.

PCE vs. CPI

Both measure inflation, but PCE differs:

• PCE accounts for consumer substitution (when beef prices rise, consumers buy chicken)
• CPI treats categories more rigidly
• PCE covers broader spending categories
• PCE typically runs 0.3-0.5 percentage points below CPI

In 2024:

• CPI: 3.2%
• PCE: 2.8-2.9%

The Fed's Target

The Fed defines its 2% inflation target in PCE terms, not CPI. When the Fed says "inflation is above target," they mean core PCE is above 2%.

If core CPI is 3% but core PCE is 2.3%, the Fed views inflation as closer to target (using PCE) than headlines suggest (using CPI).

Investor Implications

Understanding the difference prevents confusion. A headline saying "inflation hit 3.2%!" (CPI) might still be moderate when viewed through PCE (2.8%), the lens the Fed actually uses for policy.

Following PCE rather than CPI gives a better read on Fed behavior because it's the metric driving actual policy decisions.