What is the Fed’s preferred inflation measure?
The PCE gauge is broader and more dynamic than its better-known relative, the CPI
HEADLINES ABOUT inflation in America typically refer to the country’s consumer-price index (CPI), the most widely used measure of changing prices. CPI inflation slowed in August to 2.5% year-on-year. But when America’s central bankers meet on September 17th to discuss cutting interest rates, they will focus on a different index. Since 2000 the Federal Reserve has used the personal-consumption-expenditures (PCE) price index, rather than the CPI, as its preferred measure of inflation. It is against this that the Fed’s target for inflation, 2%, is compared. What are the differences between the measures—and why does the Fed use the PCE?
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