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A comparison of the CPI and the PCE price index

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  • Todd E. Clark

Abstract

In 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 Info

Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (1999)
Issue (Month): Q III ()
Pages: 15-29

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Handle: RePEc:fip:fedker:y:1999:i:qiii:p:15-29:n:v.84no.3

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Keywords: Consumer price indexes ; Personal Consumption Expenditures Price Index;

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Cited by:
  1. Demertzis, Maria & Marcellino, Massimiliano & Viegi, Nicola, 2008. "A Measure for Credibility: Tracking US Monetary Developments," CEPR Discussion Papers 7036, C.E.P.R. Discussion Papers.
  2. Stefano Eusepi & Bart Hobijn & Andrea Tambalotti, 2009. "CONDI: a cost-of-nominal-distortions index," Staff Reports 367, Federal Reserve Bank of New York.
  3. Binner, J.M. & Tino, P. & Tepper, J. & Anderson, R. & Jones, B. & Kendall, G., 2010. "Does money matter in inflation forecasting?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4793-4808.
  4. Robert W. Rich & Donald Rissmiller, 2001. "Structural change in U.S. wage determination," Staff Reports 117, Federal Reserve Bank of New York.
  5. Roberto M. Billi & George A. Kahn, 2008. "What is the optimal inflation rate?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-28.
  6. Andrew Bauer & Nicholas Haltom & William Peterman, 2004. "Examining contributions to core consumer inflation measures," Working Paper 2004-7, Federal Reserve Bank of Atlanta.
  7. Ricardo Reis, 2005. "A Dynamic Measure of Inflation," NBER Working Papers 11746, National Bureau of Economic Research, Inc.
  8. Andrew Ang & Geert Bekaert & Min Wei, 2005. "Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?," NBER Working Papers 11538, National Bureau of Economic Research, Inc.
  9. Christopher Kent, 2004. "Discussion of 'Inflation Measurement for Central Bankers'," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
  10. Andrew Bauer & Nicholas Haltom & Wiliam Peterman, 2004. "Decomposing inflation," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 39 - 51.
  11. Craig S. Hakkio, 2008. "PCE and CPI inflation differentials: converting inflation forecasts," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 51-68.
  12. Reis, Ricardo, 2005. "A cost-of-living dynamic price index, with an application to indexing retirement accounts," CEPR Discussion Papers 5394, C.E.P.R. Discussion Papers.
  13. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  14. Alexander L. Wolman & Fan Ding, 2005. "Inflation and changing expenditure shares," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 1-20.
  15. William Whitesell, 2005. "An inflation goal with multiple reference measures," Finance and Economics Discussion Series 2005-62, Board of Governors of the Federal Reserve System (U.S.).

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