Detailed interpretation of the two major inflation indicators, CPI and PCE. There are about five major differences in the statistical design and application scope of the two most common inflation indicators in the United States, CPI and PCE.

Detailed interpretation of the two major inflation indicators CPI and PCE

The two most common inflation indicators in the United States, CPI (Consumer Price Index, also known as Consumer Price Index ) and PCE (Personal Consumption Expenditure Price Index, also known as Price Index) There are about five major differences in statistical design and application scope. Judging from the results, the inflation rate calculated by CPI is often higher than that of PCE, and the volatility is greater. However, the respective characteristics of CPI and PCE make them play an important role in different scenarios.

Comparison of core CPI and core PCE (data comes from the US Department of Labor)

First of all, the two statistical agencies are different. CPI is published by the U.S. Department of Labor Statistics, while PCE is compiled by the U.S. Bureau of Economic Analysis . Secondly, in terms of statistical concepts, CPI and PCE are affected by the policy goals of their respective statistical agencies and have different theoretical colors. CPI prefers to track changes in actual consumer spending. The main function of the U.S. Bureau of Economic Analysis, which counts PCE, is to provide the U.S. government with broadly representative analysis of macroeconomic trends. The agency is also the main statistical agency for U.S. GDP figures. Therefore, although PCE has the word "individual" in its name, its statistical approach is biased toward corporate standards and focuses on the macro-representativeness of indicators.

Comparison of overall cumulative CPI and PCE (data from the US Department of Labor)

The difference in this concept is reflected in three aspects.

• The first is the way to formulate the weights of various commodities. The weights in the CPI basket of commodities are mostly obtained by tracking the actual consumption composition of consumers. However, PCE will change the weight of products based on changes in the composition of the products on the company's shelves.

• Second, CPI generally only includes goods and services paid directly by consumers, and does not include indirect payments. For example, the CPI does not include medical services paid for through employer insurance, government Medicare or Medicaid. PCE includes such products. It can also be seen that CPI is more concerned about consumers' actual expenditures, but PCE pursues broad representation.

• Third, CPI rarely changes or even does not change the composition of commodities in the index, but PCE often changes the composition of commodities by referring to the substitution effect brought about by the price increase of a single commodity. However, the calculation formulas at this level are quite complex, making it difficult to assess the statistical impact of this difference. In terms of results, both indices distinguish between core inflation (core) and overall inflation (headline). The former excludes commodities with large cyclical fluctuations such as food, oil and gas. Historically, the results of PCE statistics are often smaller than CPI, and the fluctuation range of PCE is smaller than CPI, both in core and overall terms. Detailed comparisons can be found in the accompanying figures.

The difference between core CPI and core PCE

In terms of application, the Federal Reserve’s policy philosophy drives it to pay more attention to long-term and broad-based inflation trends. Therefore, the 2% inflation rate targeted by the Fed's policy is the inflation rate calculated by core PCE year-on-year. Usually the core PCE is not less than 1.3%, and the CPI is higher than 2%, which is one of the signals that the Federal Reserve is inclined to tighten monetary policy. However, CPI also has great policy influence because it represents changes in actual consumer spending. Therefore, the United States adjusts social security payment amounts based on CPI. The face value adjustment of the important inflation-protected bonds TIPS also refers to CPI. In addition, some inflation-related financial products focus on CPI.

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