Updated: Aug 10
By Wong Kon How
Why did the Fed prefer PCE over CPI as an inflation benchmark?
Although inflation has fallen to its lowest level, the Fed appears to have already planned for another rate hike at its upcoming meeting on July 25-26.
“There is no doubt that the good news on inflation is good news indeed, it’s really too early to declare victory on inflation.” San Francisco Federal Reserve Bank President
Personal Consumption Expenditures (PCE) price index covers a broader range of goods and services compared to the CPI.
It includes personal consumption expenditures by households, businesses, and the government. This comprehensive coverage provides a more comprehensive view of overall economic activity and inflationary pressures.
The CPI uses fixed expenditure weights, which assumes that consumer spending patterns remain constant over time. In contrast, PCE provides a more sensitive measurement of inflation.