A comparison of inflation indices: the Consumer Price Index (CPI), which is produced by the Bureau of Labor Statistics (BLS); the Personal Consumption Expenditures (PCE) price index is prepared by the Bureau of Economic Analysis (BEA).
The PCE fell slightly this month, but it is hard to tell what this means for the CPI. There is correlation because both are driven by price changes, but the wiggles and differences in the short run are hard to forecast.
Differences in the indices:
1. Formula effects. The CPI and the PCE index are constructed from different index-number formulas. The CPI index is an average based on a Laspeyres formula, whereas the PCE index is based on a Fisher-Ideal formula.
2. Weight effects. The relative weights assigned to each of the CPI and PCE categories of items are based on different data sources. The relative weights used in the CPI are based primarily on the Consumer Expenditure Survey, a household survey conducted for the BLS by the Census Bureau. The relative weights used in the PCE index are derived from business surveys—for example, the Census Bureau’s annual and monthly retail trade surveys, the Service Annual Survey, and the Quarterly Services Survey.
3. Scope effects. The CPI measures the change in the out-of-pocket expenditures of all urban households and the PCE index measures the change in goods and services consumed by all households, and nonprofit institutions serving households.
4. Other effects. A variety of remaining differences consisting of seasonal-adjustment differences, price differences, and residual differences must be taken into account for a complete understanding of the differences between the CPI and the PCE index.
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