What are the knock-on effects of higher oil prices beyond the pump?
Shechar Dworski, Head of Economics and Director, Macro Strategy at PICTON Investments
Why do CPI and PCE tell two different inflation stories?
Shechar Dworski, PhD, CFA, Head of Economics and Director, Macro Strategy
The Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index are both measures of how prices change over time for goods and services purchased by households. Yet they tell subtly different stories. In the U.S., the Consumer Price Index is produced by the Bureau of Labor Statistics (BLS), while the Personal Consumption Expenditures index comes from the Bureau of Economic Analysis. These different agencies employ different methodologies, which is why they often diverge in their inflation narratives.
The CPI tracks the cost of a fixed basket of goods and services that a typical urban consumer buys. The BLS surveys households to determine what is in the basket, then tracks prices at retail locations each month. Critically, it only covers out-of-pocket spending by consumers.
The PCE takes a broader approach. Rather than surveying consumers directly, it draws primarily from business surveys and GDP data to estimate what people are spending on. The PCE also includes spending made on behalf of consumers, like health insurance, which the CPI excludes. Healthcare represents a much larger share of PCE than CPI because PCE includes third-party payments, while housing carries a heavier weight in CPI, roughly 30 to 35% versus around 15 to 17% of PCE.
The weighting approach represents the biggest distinction. The CPI uses a fixed-weight index, which tends to overstate inflation slightly because it does not account for people substituting cheaper alternatives when prices rise. The PCE uses a chain-weighted index that captures this substitution effect, so it generally runs about 0.3 to 0.5% lower than CPI.
This matters for policy. Policymakers favor the PCE approach because of its broader scope and less distortion from substitution bias. The Federal Reserve specifically targets 2% annual core PCE inflation, stripping out volatile food and energy prices. Meanwhile, the CPI remains what most people encounter in daily life, adjusting Social Security payments and tax brackets.
Source: Bloomberg L.P., Picton Mahoney Asset Management Research. Jan 2006 to Feb 2026.
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