The Fed’s Favorite Inflation Measure Cooled Down Even Further in June

EconEye Admin

3 years ago

The Personal Consumption Expenditures price index rose 3% for the 12 months ended in June, down from 3.8% in May. The Fed uses the core PCE index as the benchmark for its 2% inflation rate target. The core PCE index showed prices increased 4.1% in June from the year before.—cnn.com

Answer the following questions to check your understanding of the story.

What is the core PCE and how does it differ from the PCE?

The PCE _____________ and the core PCE _____________.

a) is a measure of the average of the prices paid by urban consumers for a fixed basket of consumer goods and services; excludes the prices of clothing, food, and shelter

b) is a monthly chain-linked index of all consumer prices; excludes the prices of housing, medical care, and recreation

c) is a monthly chain-linked index of all the goods and services that are counted as part of GDP; excludes the prices of food and energy

d) is a monthly chain-linked index of all consumer prices; excludes the prices of food and energy

Wrong! - What prices are included in the PCE? How does the core PCE differ from the PCE?

Well Done! - The PCE price index is a measure of the prices of all the items included in the personal consumption expenditures component of GDP. It is a monthly chain-linked index of all consumer prices. The core PCE is calculated similarly but excludes the prices of food and energy.

Why does the Fed prefer to use the core PCEPI over the core CPI as the benchmark for its inflation rate target?

The PCEPI ____________.

a) has a more recent reference base year than the CPI

b) is a more stable measure than the CPI because it updates its market basket infrequently

c) is a monthly chain-linked index so it is free from the biases present in the CPI

d) includes the price of financial assets and the CPI does not

Wrong! - How is the PCEPI calculated? How does this calculation compare to the CPI? Why would the Fed prefer the PCEPI?

Good Job! - The Fed wants to use the most accurate measure of inflation, so it chooses the core PCEPI. The PCEPI is a monthly chain-linked index, which is calculated using the current month’s and the previous month’s baskets of goods and services. By updating the market basket monthly, the PCEPI avoids the biases present in the CPI.

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