A plain-English guide to PCE vs CPI.

The US has two main inflation gauges: CPI from the Bureau of Labor Statistics and PCE from the Bureau of Economic Analysis. They cover roughly the same prices, but they answer different questions. The Fed has formally targeted PCE since 2012; the popular press almost always quotes CPI. The two prints can diverge by 30 to 60 basis points in a given year, and a strategist reading the wrong one into a Fed decision will end up off-side. This is the explainer on the difference, the math behind it, and what the newly confirmed Chair's preference for the Dallas trimmed-mean variant means for how this Committee is likely to read the data.

What each index actually measures

The two indices answer adjacent questions about consumer prices.

• CPI measures the price of a fixed basket of goods and services bought by urban consumers. The basket is reviewed every two years using the Consumer Expenditure Survey. Coverage is everything an urban household pays for out of pocket: groceries, gas, rent, transportation, healthcare paid directly by the consumer.
• PCE measures consumption expenditure across the whole economy, including spending made on behalf of households. The largest such item is healthcare paid through employer insurance and Medicare. PCE weights are rebuilt every month using the national-income accounts data, so they track consumer substitution behaviour in close to real time.

Two structural consequences fall out of those definitions. First, PCE has a wider scope. Healthcare is roughly 17 percent of PCE versus roughly 7 percent of CPI, because PCE counts third-party payments and CPI counts only the consumer's slice. Second, PCE incorporates substitution: when the price of beef rises and households shift to chicken, the PCE basket re-weights toward chicken in the next month. CPI's fixed basket does not adjust until the next bi-annual revision. The combined effect is that PCE prints lower than CPI on average; the historical wedge is roughly 30 to 40 basis points on the headline measure.

Why the Fed prefers PCE

The Federal Reserve formally adopted PCE as its inflation gauge in 2012, when Bernanke's Committee published the 2 percent target. Three reasons drove the switch.

1. Coverage. The Committee makes policy that affects total consumer spending, not just the urban out-of-pocket slice. PCE's broader scope maps better onto the population whose welfare the Fed is mandated to support.
2. Substitution. A fixed-basket measure systematically overstates the cost-of-living change because it cannot capture households switching to cheaper alternatives. PCE's monthly re-weighting captures this; the academic consensus is that it more accurately reflects realised welfare loss from rising prices.
3. Revisability. PCE is revised when the national accounts are revised. CPI never is. Over a multi-year run, the PCE history is internally consistent in a way the CPI history is not. For a Committee that publishes the SEP twice a quarter and updates its policy framework on a five-year cycle, that matters.

The Core, the Trimmed, and the Median

Headline inflation is volatile because food and energy prices move on supply shocks that the central bank cannot influence. To extract the underlying signal, four cleaner measures are published alongside each headline release.

• Core CPI / Core PCE. Headline minus food and energy. The simplest decomposition; it has the disadvantage that it removes both items uniformly even when one of them is transmitting a real demand shock.
• Trimmed-mean PCE (Dallas Fed). Sorts each month's component price changes in order, drops the bottom 24 percent and top 31 percent of the distribution by weight, and reports a weighted average of what remains. The asymmetric trim was calibrated against the historical noise structure; in practice the trimmed mean has the best track record of forecasting headline PCE one to two years ahead.
• Median PCE (Cleveland Fed). The middle of the distribution by weight; the most robust to outliers, the slowest-moving of the four.
• Supercore. Core services excluding housing. Captures the demand-driven services pricing pressure that Powell began emphasising in 2022, on the argument that it is the cleanest read of underlying labour-cost transmission.

Where today's prints sit

Plotted below: the latest year-on-year prints across CPI, Core CPI, PCE, Core PCE, and the Dallas trimmed-mean PCE, against the Fed's 2 percent target.

The Warsh angle

The newly confirmed Chair has written publicly that the trimmed-mean PCE is a better signal than core PCE. The argument is technical: stripping food and energy uniformly removes useful information when those components are themselves transmitting demand pressure, while leaving in administered-price categories (medical services, education) that are noisy but not inflationary. The trimmed mean addresses both by removing only the tails of the distribution each month.

The practical implication, if Warsh's preference shapes the Committee's narrative, is that the FOMC will frame inflation progress more on the trimmed mean and the median than on the core. The two are usually within 10 basis points of each other, but in periods of supply-shock volatility they can diverge by 30 to 50 basis points. Watch our analysis chain for how the framing change shows up in Committee communications under the new Chair.

Translating between the two

A useful shorthand for translating CPI prints into expected PCE prints, derived from the post-2010 sample:

PCE ≈ CPI − 0.35 percentage points (average wedge), with a one-standard-deviation range of roughly ±20 basis points around that average. The wedge widens when energy is moving (CPI has more energy weight) or when shelter inflation diverges from its long-run mean (CPI uses owners' equivalent rent with a longer lag than PCE).

For Core CPI to Core PCE the wedge is similar but smaller, around 25 basis points, because the food and energy components have been stripped. The remaining wedge is dominated by the healthcare weighting difference.

What the indices do not tell you

1. The composition of the move. A 30 basis-point core PCE move can be all rents, all medical services, or all one-off categories. The composition matters more for policy than the level. Always read the contributions tab, not just the headline.
2. Forward-looking distinctness. The Cleveland Fed publishes a Nowcasting model that extrapolates the running month's print from daily data. The model is usually within 10 basis points of the release at the time of publication.
3. Distributional impact. Both measures are aggregates. They tell you nothing about how inflation is distributed across the income distribution; the BLS publishes a separate "research" CPI for elderly households that runs higher than headline, for example.
4. What it means for the Fed's reaction function. The index print is the input. What the Committee does with it depends on the framework (FAIT, or whatever replaces it) and the regime call. Read the FOMC statement, not just the print.

Related reading

• Today's analysis: Core PCE ticked up. The dollar didn't.
• The OIS framework for reading the Fed's expected path: A plain-English guide to OIS
• The dollar regime through which inflation prints get transmitted: A plain-English guide to the dollar smile
• Earlier in the dollar thread: DXY finally moved