A comparison of the CPI and the PCE price index
AbstractIn the United States, there are two broad indexes of consumer prices: the consumer price index, or CPI, and the chain price index for personal consumption expenditures, or PCEPI. Because the indexes are similar in many respects, the inflation rates measured with them often move in parallel. There are, however, some important differences, which, at times, can lead to large gaps between CPI and PCEPI inflation rates. In 1998, for example, the CPI rose 1.5 percent, while the PCEPI increased just 0.7 percent. The discrepancy was even larger excluding food and energy prices: the core CPI grew 2.4 percent in 1998, while the core PCEPI rose just 1.2 percent.> Such gaps between CPI and PCEPI inflation rates raise a simple question: Is one index better than the other? From a monetary policy perspective, an index could be superior in two respects. First, one of the price indexes might be a more accurate measure of inflation today and in the very recent past. To gauge progress toward price stability over the past year, for example, a policymaker would like to know if either the CPI or PCEPI more accurately measures consumer price inflation today. Second, one of the indexes could be a superior measure of historical inflation rates. A policymaker would probably want to use the better historical indicator for gauging long-term price trends and developing inflation forecasting models.> Because some observers have recently suggested the PCEPI may be a better price index, Clark examines whether the PCEPI is truly superior to the CPI. He reviews the differences in the construction of the indexes and examines the advantages and disadvantages of the CPI and PCEPI. He concludes that, while some observers might weigh the many pros and cons of the indexes differently, with recent improvements the CPI is the better price index.
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Bibliographic InfoArticle provided by Federal Reserve Bank of Kansas City in its journal Economic Review.
Volume (Year): (1999)
Issue (Month): Q III ()
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