PCE measures total spending by individuals and households on goods and services. The PCE Price Index is the Federal Reserve's officially preferred inflation measure, stated explicitly in their 2% inflation target framework since January 2012.
PCE vs. CPI β Why They Differ
PCE typically runs 0.3-0.5 percentage points lower than CPI due to three key differences: (1) PCE uses chain-weighted formula that accounts for consumer substitution effects (when beef gets expensive, people buy chicken); (2) PCE covers a broader scope including employer-paid healthcare; (3) Shelter has a lower weight in PCE (~15%) vs. CPI (~36%). The BEA publishes PCE as part of the Personal Income and Outlays report.
Core PCE β The Fed's North Star
Core PCE (excluding food and energy) is the number the Fed watches most closely. In the post-2022 inflation period, the 'Supercore PCE' (core services excluding housing) gained importance as it best captures wage-driven inflationary pressures.
Historical Context
Core PCE peaked at 5.6% YoY in February 2022 (BEA), then declined toward the 2% target through 2023-2024. During the Great Recession (2008-09), core PCE fell to just 1.0%. The Fed's 2% target was formally adopted in January 2012 under Chairman Bernanke.