CPI vs PCE

The Consumer Price Index (CPI), published by the Bureau of Labor Statistics, measures prices paid directly by urban consumers for a fixed basket of goods and services. The Personal Consumption Expenditures (PCE) price index, published by the Bureau of Economic Analysis, measures prices for everything U.S. households actually buy — including purchases made on their behalf (for example, employer-paid health insurance).

Two structural differences drive the persistent gap between them. First, scope: PCE captures out-of-pocket medical care plus the larger share paid by Medicare, Medicaid and employers, so healthcare carries roughly twice the PCE weight it does in CPI. Housing is the opposite — shelter is about a third of CPI but only about 15% of PCE, because PCE's broader basket dilutes it. Second, substitution: PCE uses a chain-weighted formula that lets the basket rotate as consumers substitute toward cheaper alternatives; CPI's headline series uses fixed weights that are updated less frequently.

The result is that PCE typically runs 0.25–0.5 percentage points below CPI over long periods. When shelter inflation spikes, as it did in 2022–2023, the gap widens because shelter's outsized CPI weight pulls that index higher while PCE's smaller shelter weight leaves it closer to underlying trend.

The Federal Reserve's 2% inflation target is defined in terms of PCE — specifically, core PCE (excluding food and energy). That's why the PCE release each month moves Treasury yields more than the more famous CPI release even though CPI is published two weeks earlier.