While we will reluctantly resist the pull into weedy details, we will note a few consistent impacts of these differences. The figure above decomposes recent monthly PCE and CPI inflation reads between these four factors. Also, the two incorporate different patterns of seasonal adjustment. For example, both CPI and PCE measure the price of airfare, but CPI calculates it using a fixed basket of air routes, while PCE calculates it using data on airline passenger revenues and passenger miles traveled. Other reasons: A grab bag of other differences, including different price data for what is conceptually the same product.Scope: they measure the prices of somewhat different consumer items and who purchases them.Weights: they apply different weights to their consumption categories.Formulas: the growth in the two indices from one time period (month, quarter, year) are computed using substantively different formulas. There are four main reasons for this difference: In the rest of this post, we will explore why these differences arise. In fact, since 2000, annual PCE inflation has been around 0.4 percentage point lower than CPI inflation on average. But in August, the headline CPI was 0.6 percent while the PCE came in, as noted, at 0.4 percent in other words, the difference grew by 0.2 percentage point. For example, in July, headline CPI and PCE inflation were close, each roughly 0.2 percent, and therefore a difference of nearly zero. Nevertheless, the two often show different inflation results over the same time period (see figure below). The two measures often move together, and in fact many of the underlying price indices that make up the PCE come directly from the CPI. Inflation analysts generally track two separate measures of inflation: the Consumer Price Index (CPI) and the PCE.
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