Difference in percentage change between CPI and PCE

 

The graph illustrates the difference in percentage change between the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) over a long-term historical period, stretching from shortly after 1948 to the present day.

The blue line represents the difference in percentage change between CPI and PCE, and the dashed red line indicates the average difference over the entire period shown. Here are some observations based on the graph:

1. Volatility: The blue line indicates periods of volatility where the difference between the CPI and PCE percentage changes fluctuates significantly. This is especially notable during the late 1970s and early 1980s, a period known for high inflation and economic instability in the United States.

2. Average Difference: The average difference in the percentage change over the period shown is 0.47%, as indicated by the red dashed line. This suggests that, on average, the CPI has been higher than the PCE by this margin.

3. Last Value: The graph notes the last recorded value at 1.08%. This is above the average, indicating that in the most recent period, CPI has risen more than PCE when compared to the historical average difference.

The difference between CPI and PCE percentage changes can be attributed to several factors:

• Weighting: The CPI uses a fixed basket of goods and is based on what urban consumers are buying. The PCE, however, adjusts more frequently to reflect actual consumer behavior.

• Scope of Goods and Services: PCE includes more goods and services, such as medical care provided to individuals through employer-sponsored health insurance, which CPI does not.

• Coverage: CPI only considers out-of-pocket expenses for consumers, whereas PCE also includes expenditures on behalf of consumers, like health care paid by employer-provided health insurance, Medicare, and Medicaid.

Understanding the nuances between these indices is crucial for economists and policymakers as they offer different perspectives on inflation and consumer behavior. While CPI is often used for cost-of-living adjustments, PCE is preferred by the Federal Reserve when making decisions about monetary policy because it provides a broader measure of consumer spending.