Money & Finance › The Fed, money supply & inflation › Inflation: rising prices, shrinking purchasing power
CPI, PCE and core inflation
CPI since 1919· Concept
Fact, law or dataA rule, statute, definition or measured number.
The main US price gauges: the Consumer Price Index, the PCE price index, and 'core' versions that exclude food and energy.
See it on the Money & Finance map →How it works
The Consumer Price Index (CPI), from the Bureau of Labor Statistics, tracks prices of a fixed basket bought by urban households; housing costs are about a third of it. The Commerce Department's PCE index is broader, includes spending made on households' behalf such as employer health insurance, and shifts weights as people switch products, so it usually runs a few tenths lower. 'Core' versions drop volatile food and energy to show the underlying trend.
Why it matters
These numbers move money directly: CPI adjusts Social Security checks, tax brackets, and the principal of TIPS and the rate on I bonds, while the Fed's 2% goal keys off PCE.
Think of it like
Like the CPI escalation clause in a commercial lease: which index you pick decides how much the rent rises.
Facts, rules and data
BLS gathers tens of thousands of price quotes each month; the Commerce Department builds PCE from GDP spending data. Both publish methods and long histories online.
Debates and risks
Whether CPI overstates inflation (the 1996 Boskin Commission said by about 1.1 points a year) and how to measure housing and quality changes remain debated.
Connections (2)
▸The 2% inflation target is defined using PCE, one of CPI, PCE and core inflationFact, law or data
The connection
The target is 2% annual change in the PCE price index, not the better-known CPI. The Fed prefers PCE because it covers more spending and adjusts as people switch products. CPI usually runs a few tenths higher, so 2% on PCE means somewhat more than 2% on CPI.
When and why
The Fed switched its main gauge from CPI to PCE in 2000 and wrote PCE into the 2012 target.
How we know
The FOMC's longer-run goals statement names PCE; the Commerce Department publishes it monthly, about two weeks after the CPI.
Debates and risks
The Fed watches core PCE for the trend but targets the headline figure; how much to look through food and energy spikes, as in 2022, is debated.
▸Social Security Administration (SSA) raises benefits yearly using CPI-W, one of CPI, PCE and core inflationFact, law or data
The connection
Each year SSA compares the average CPI-W, a CPI version for urban wage earners and clerical workers, for July through September with the same months a year earlier. Benefits rise by that percentage the next January: 8.7% for 2023, the most since 1981, and 2.8% for 2026.
When and why
Congress made the adjustment automatic in 1972, effective 1975; SSA announces it each October after the Bureau of Labor Statistics releases September CPI.
How we know
The Social Security Act's cost-of-living formula (42 U.S.C. 415(i)) and SSA's published history of each year's adjustment and calculation.
Debates and risks
Retiree advocates say an index for older people (CPI-E), weighted more toward health care, would raise payments; others propose the slower 'chained' CPI to save money.