PCE

The other inflation basket. It is broader than CPI, it counts spending paid for on a household's behalf, and its weights follow what people actually buy. That combination is why a central bank prefers it.

A second basket, built differently

PCE inflation is the change in prices of the things people consume, measured from the expenditure side of the national accounts. The letters stand for personal consumption expenditures - the same consumption line that sits inside the calculation of GDP. Where CPI prices a fixed shopping list, PCE prices the whole consumption sector.

The first real difference is what gets counted. Health care paid for by an insurer or a government programme is consumption, and PCE includes it: it enters the index even though no household hands over money at a till. That is what paid on households' behalf means, and it is why the PCE basket is broader than the CPI one.

Weights that move

The second difference is the weights. Each index weights a category by how much spending goes to it, but the weights are built from different sources and revised on different schedules. PCE weights track actual expenditure, so spending can shift away from a category whose price has jumped. CPI weights a fixed basket between revisions, so it holds the old mix and records the full price move instead.

Why a central bank prefers it

A central bank sets its target on the consumption deflator for two reasons. It is broader, so it is less distorted by a single category. And it lets weights drift, so it captures substitution - the fact that households respond to relative prices rather than buying a frozen list forever.

None of this makes CPI wrong. CPI answers a narrower question: what does an out-of-pocket urban shopping list cost? The checkable use of the pair is to read both prints for the same month and ask which category is driving the gap. If the two disagree, the disagreement itself is the information.

Related: Core Inflation · Base Effect · GDP

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