Why Are Headline PCE and Median PCE Inflations So Far Apart?

In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks. The Cleveland Fed is part of the Federal Reserve, the central bank of the United States. With offices in Cleveland, Cincinnati, and Pittsburgh, we serve an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

In the Philadelphia, PA area during October 2024, the inflation rate for recreation was 5.2%.

In summary, there are many measures of inflation that differ in how they weight price changes in categories of goods and services. Examining differences between these measures can shed light on some sources of inflationary pressures, although in the longer run, monetary policy can restrain aggregate demand to maintain price stability. Core inflation is a version of CPI that removes components that can exhibit large amounts of volatility from month to month, causing unwanted distortion to the headline figure.

What Is Headline Inflation and How Is It Related to the Consumer Price Index?

The personal consumption expenditures price index, commonly known as the PCE price index, is one of the main measures of inflation and consumer spending in the U.S. The Bureau of Economic Analysis (BEA) publishes the PCE price index each month to track spending and inflation. The core inflation rate measures the inflation only for those not in the food and petroleum sectors like the electronic sector and information technology. If the inflation rate is 1% to 2%, then the consumers will start buying goods and services, stimulating the economy’s growth. However, if it becomes too high and the salary does not increase, that may increase growth in essential commodities, excluding other products.

Therefore, the Fed uses core inflation minus the food and oil prices to calculate current inflation to find the right inflation rate. The Fed uses PCE, the representation of the prices of goods and services, and CPI to predict the inflation of the United States economy. The US core inflation rate is 6.02% in 2022, which is higher than the 3.80% rate in 2021. It is crucial to measure core inflation because it reflects the relationship between the price of goods and services and the level of consumer income. If prices for goods and services increase over time but consumer income doesn’t change, consumers will have less purchasing power.

Current Rate

Say the price of gasoline rises in a given month but the price of tomatoes falls. Gasoline represents a larger portion of a family’s monthly budget, so it’s weighted more heavily in calculating PCE. That means rising gas prices have a bigger impact on the overall index than cheaper tomatoes.

1. Conversely, if it were determined that headline CPI inflation is the better measure (and, therefore, that the PCE understates the true inflation rate), then the FOMC should target CPI inflation rather than PCE inflation.
2. It excludes other expenditures that are not paid for directly, for example, medical care paid for by employer-provided insurance, Medicare, and Medicaid.
3. As we did for the full period since 2012, we can again remove components to uncover which are most responsible for creating the separation after July 2018.
4. For example, if core inflation remains low despite a rise in headline inflation due to a temporary spike in oil prices, a central bank might decide to maintain lower interest rates to support economic growth.
5. Similarly, you won’t be putting off buying your groceries just because prices are rising at the store.

Continuing to use the CPI would imply over-adjusting for inflation and, in effect, giving real increases in benefits over time. In this scenario, benefits should be adjusted for inflation using the PCE instead. Conversely, if it were determined that headline CPI inflation is the better measure (and, therefore, that the PCE understates the true inflation rate), then the FOMC should target CPI inflation rather than PCE inflation. Also, oil and gas are commodities and are traded on exchanges where traders can buy and sell them. The speculation of energy and food commodities headline inflation vs core inflation leads to volatility in their prices, causing wild swings in the inflation figures. The effects on inflation can be brief, meaning they ultimately correct themselves and the market returns to a balanced state.

Federal Reserve Bank of Cleveland

Another important difference between core inflation and headline inflation is the impact of external factors on each measure. Because core inflation excludes food and energy prices, it is less affected by external shocks such as changes in oil prices or weather-related disruptions to food production. This allows core inflation to provide a more accurate picture of underlying inflationary pressures in the economy. On the other hand, headline inflation can be influenced by external factors, making it more susceptible to short-term fluctuations that may not reflect the true inflationary trend. Core inflation, by contrast, aims to filter out this volatility to present a clearer picture of underlying inflation trends. By excluding food and energy prices, core inflation offers a more stable and consistent measure.