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The CPI–PCEPI Inflation Differential: Causes and Prospects

Author

Listed:
  • Carola Binder
  • Wesley Janson
  • Randal J. Verbrugge

Abstract

The Federal Open Market Committee’s inflation target is stated in terms of the personal consumption expenditures price index (PCEPI). The PCEPI, like the consumer price index (CPI), measures inflation in the expenditures of households, but these indexes differ in purpose, scope, and construction. Notably, since the CPI is used as the reference rate for numerous financial contracts, one can derive implied longer-run CPI inflation forecasts from financial contracts. Such forecasts are widely reported. But if policymakers are to use these forecasts to guide their pursuit of the inflation target, they need to translate these CPI inflation forecasts into corresponding implied PCEPI forecasts. Since 1978, CPI inflation has averaged 0.3 percentage points above PCEPI inflation, but this differential has varied significantly over time. In this Commentary, we explain why, investigate a key historical episode, and provide an updated estimate of the likely differential going forward.

Suggested Citation

  • Carola Binder & Wesley Janson & Randal J. Verbrugge, 2020. "The CPI–PCEPI Inflation Differential: Causes and Prospects," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2020(06), pages 1-8, March.
    • Handle: RePEc:fip:fedcec:87552
    DOI: 10.26509/frbc-ec-202006
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    References listed on IDEAS

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    1. Craig S. Hakkio, 2008. "PCE and CPI inflation differentials: converting inflation forecasts," Economic Review, Federal Reserve Bank of Kansas City, vol. 93(Q I), pages 51-68.
    2. Clinton P. McCully & Brian C. Moyer & Kenneth J. Stewart, 2007. "A Reconciliation between the Consumer Price Index and the Personal Consumption Expenditures Price Index," BEA Papers 0079, Bureau of Economic Analysis.
    3. W. Erwin Diewert, 2009. "Durables and Owner-Occupied Housing in a Consumer Price Index," NBER Chapters, in: Price Index Concepts and Measurement, pages 445-500, National Bureau of Economic Research, Inc.
    4. W. Erwin Diewert & John S. Greenlees & Charles R. Hulten, 2009. "Price Index Concepts and Measurement," NBER Books, National Bureau of Economic Research, Inc, number diew08-1, March.
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