What is the difference between PCE and CPI?

PCE (Personal Consumption Expenditures) and CPI (Consumer Price Index) are both measures of inflation, but they differ in several ways:

  1. Coverage: PCE covers a broader range of goods and services than CPI. PCE includes all goods and services that individuals buy, while CPI covers a specific basket of goods and services commonly purchased by urban households.
  2. Calculation: PCE uses a chain-weighted index methodology, while CPI uses a fixed-weighted index methodology. This means that PCE accounts for changes in consumption patterns over time, while CPI does not.
  3. Frequency: PCE is released on a monthly basis, while CPI is released monthly and also has a more widely followed core version that excludes food and energy prices.
  4. Use: PCE is the preferred measure of inflation used by the Federal Reserve, while CPI is more widely used by consumers and policymakers as a benchmark for adjusting salaries, social security benefits, and other payments.

Overall, both PCE and CPI are important measures of inflation, and each has its own strengths and weaknesses. Policymakers and economists use both measures to get a more comprehensive view of inflation trends in the economy.

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