Inflation: CPI and PCE

Two gauges, one question

Inflation is the rate at which prices rise. The Consumer Price Index, from the Bureau of Labor Statistics, prices a fixed basket of what urban households buy: rent, groceries, gasoline, cars, haircuts, and tens of thousands of other items collected every month. It lands around the middle of the month at 8:30 AM Eastern and covers the month before.

The PCE price index, from the Bureau of Economic Analysis, arrives at the end of the month inside the Personal Income and Outlays report. It measures a broader set of spending, including what employers and the government pay on your behalf like health insurance, and its weights shift as people change what they buy. The Fed's 2 percent target is defined on PCE, which is why core PCE is called the Fed's preferred gauge.

Headline, core, and the decimals

Headline inflation includes everything. Core strips out food and energy, not because they do not matter to your budget, but because they swing with weather and oil prices and tell you less about where inflation is heading. Most of the market reaction is to core.

Prints are quoted month over month to one decimal place. The difference between 0.2 and 0.3 percent in a month sounds trivial until you annualize it: 0.2 a month is about 2.4 percent a year, while 0.3 is about 3.7 percent. That gap is roughly the distance between the Fed relaxing and the Fed staying tight, which is why a single tenth can move rate expectations.

Year over year figures are smoother but slow: they carry twelve months of history, so a hot month from last year falling out of the window can lower the annual rate even if this month was unremarkable. Economists call those base effects.

What a surprise looks like

Consensus for core CPI is usually clustered around 0.2 or 0.3. A 0.4 or a 0.1 is a real surprise and tends to move bond yields sharply. Shelter, which is about a third of the index and moves slowly, and a handful of volatile categories like airfares and used cars are where most surprises come from, so the details matter as much as the headline.