CPI vs PPI vs PCE: The Inflation Reports Compared
Updated
Three reports, three questions
The United States has three monthly inflation reports that markets watch closely: the Consumer Price Index (CPI), the Producer Price Index (PPI) and the Personal Consumption Expenditures (PCE) price index. They are often lumped together as “inflation data”, but each answers a different question.
- CPI asks: how much more are urban households paying out of pocket for a typical basket of goods and services?
- PPI asks: how much more are U.S. producers being paid for what they sell?
- PCE asks: how much more does all consumer spending in the economy cost, including spending made on households’ behalf?
Because the questions differ, the answers differ too, and it is normal for the three to tell slightly different stories in the same month.
At a glance
| CPI | PPI | PCE price index | |
|---|---|---|---|
| Publisher | Bureau of Labor Statistics | Bureau of Labor Statistics | Bureau of Economic Analysis |
| Measures | Prices paid by urban consumers | Prices received by domestic producers | Prices of personal consumption spending |
| Headline | All items, CPI-U | Final demand | PCE price index |
| Common core measure | All items less food and energy | Final demand less foods, energy and trade services | PCE excluding food and energy |
| Release time | 8:30 AM ET | 8:30 AM ET | 8:30 AM ET |
| Usual timing | Around mid-month, for the prior month | Close to CPI, before or after | Late in the month, for the prior month |
| Revisions | Unadjusted index generally final; seasonally adjusted data revisable for five years | Revised for up to four months | Revised with each release and in broader updates |
| Main role | Most-watched inflation number | Supply-side signal; feeds parts of PCE | The Federal Reserve’s 2 percent target |
The Consumer Price Index
The CPI is the inflation figure most people know. The Bureau of Labor Statistics collects prices each month for a wide range of goods and services, from groceries and gasoline to rent, medical care and airfares, and weights them by how much consumers spend on each.
The main index, the CPI for All Urban Consumers (CPI-U), covers more than 90 percent of the U.S. population. A narrower index, the CPI-W, covers households of wage earners and clerical workers.
Markets focus on the month-over-month change in core CPI, which excludes food and energy because those prices are volatile. CPI usually arrives first among the three and carries the most surprise value, which is why it tends to produce the biggest market reaction.
The Producer Price Index
The PPI measures prices from the seller’s side, at the first commercial transaction. Its headline is the final demand index, which covers goods, services and construction sold to final users.
Two features make the PPI tricky to read:
- Trade services measure the margins earned by wholesalers and retailers, not the prices of goods themselves. Margins can swing sharply, which is why the core measure BLS highlights excludes them alongside food and energy.
- Pass-through is loose. Producer price changes do not reliably flow through to consumer prices; businesses absorb, delay or offset them.
The PPI’s market importance comes partly from its link to PCE: BEA uses some PPI indexes, notably for health care services such as hospitals and physicians’ offices, when building the PCE price index.
The PCE price index
The PCE price index is published by the Bureau of Economic Analysis in the monthly Personal Income and Outlays report, together with data on income, spending and saving.
It matters because the Federal Open Market Committee defines its longer-run goal as inflation of 2 percent, measured by the annual change in the PCE price index. When the Fed talks about inflation relative to target, this is the measure it means.
BEA derives most PCE prices from BLS consumer and producer price indexes. That is why forecasters can estimate core PCE closely once CPI and PPI are out, and why the PCE release itself often surprises less.
Why CPI and PCE give different answers
BEA groups the differences between CPI and PCE into four categories:
- Formula. CPI uses a modified Laspeyres formula built around a fixed basket. PCE uses a Fisher-Ideal formula that reflects how consumers shift their purchases when relative prices change.
- Weights. The two indexes give different relative importance to the same items, partly because they draw on different sources of spending data.
- Scope. CPI covers out-of-pocket spending by urban households. PCE also covers spending made on households’ behalf, such as medical care paid for by employers and government programs, and spending by nonprofits that serve households.
- Other effects, including differences in seasonal adjustment and in some underlying prices.
The result is that the two measures can diverge, and the gap between them changes over time. Neither is “right”; they are built for different purposes. CPI is designed to measure the cost of living for households and is used to adjust tax brackets and many contracts. PCE is designed to fit within the national accounts and covers a broader range of spending.
Headline versus core
All three reports have a headline measure and one or more core measures. Core strips out food and energy, which swing with weather, harvests and global oil markets. The aim is to see the underlying trend, the part of inflation more likely to persist.
Core is not “inflation without the things people actually buy”. Food and energy matter enormously to households. Core is a tool for forecasting where inflation is heading, and the Fed’s target itself is defined in terms of headline PCE.
The monthly sequence
A typical month unfolds in a predictable order:
- CPI arrives first, around the middle of the month.
- PPI comes within a day or two of CPI.
- Forecasters combine the two into an estimate of PCE.
- PCE arrives near the end of the month, sometimes on the same day as a GDP estimate.
By the end of that sequence, markets usually have a clear picture of the prior month’s inflation.
How markets commonly react
The common description is that higher-than-expected inflation, especially in core measures, pushes Treasury yields and the dollar up and weighs on stocks, because it raises the chance of tighter Federal Reserve policy. Lower-than-expected inflation is said to do the opposite.
These reactions are tendencies. They depend on what was expected, which components surprised, where the Fed is in its policy cycle and what else is happening. CPI usually draws the largest reaction because it comes first; PPI and PCE more often confirm or adjust a picture already formed. None of this is a reliable guide to how markets will move.
Common misreadings
- Expecting CPI and PCE to match. Different formula, weights and scope make that unlikely.
- Calling PPI “wholesale inflation”. It covers services and construction too.
- Confusing “inflation is falling” with “prices are falling”. A lower inflation rate means prices are rising more slowly.
- Comparing the wrong core. Check which core measure a headline uses before comparing it with a forecast.
Where to read more
BEA’s own explanation of the CPI and PCE differences is in its FAQ on the two indexes. For the role these reports play in policy, see Fed meeting day explained, and for how they rank against other data, see economic indicators ranked by market impact.