PCE and PPI: the inflation gauge the Fed prefers

STEP 1PCE: the inflation the Fed watches

The CPI in Lesson 8 was a 'shopping basket price tag'. PCE is also a shopping basket inflation measure, but the way the basket is filled is a little different. Let's look at that difference step by step.

PCE measures prices for 'all the money spent for households'

PCE inflation is the personal consumption expenditures price index published at the end of each month by the US Commerce Department's Bureau of Economic Analysis (BEA). While CPI, from the Bureau of Labor Statistics (BLS), is based on household surveys and measures prices of 'money households pay directly out of their own pockets', PCE is based on the consumption items in gross domestic product (GDP) statistics and measures prices of 'all consumption spent on behalf of households'. In Lesson 4 we split GDP into consumption, investment, government spending and net exports, and PCE measures the prices of the consumption part.

There are three main differences. First, scope. Health insurance premiums that an employer pays on your behalf, or medical costs the government pays on your behalf, are not paid directly by households, so they are left out of CPI but included in PCE. Second, weights. Because its scope is wider, rent has a smaller weight in PCE than in CPI. Third, how quickly the basket is changed.

The Fed's 2% target is based on PCE

In January 2012, the US Fed formally set "2% inflation" as its target and based it on the year-over-year change in headline PCE inflation. It sees PCE as closer to actual changes in the cost of living because of its wider scope and its reflection of the substitution effect. However, when judging the trend, the Fed also looks at core PCE, which excludes food and energy. As you saw in Lesson 8, food and energy can swing sharply for a time.

Does that make CPI less important? No. CPI comes out about two weeks before PCE, and many of CPI's detailed items are used directly in calculating PCE. So the market often uses CPI to guess that month's PCE in advance, and takes PCE as the number that confirms the guess. The one that moves the market most is usually CPI, because it comes out first.

The Bank of Korea uses CPI as its basis

The reference gauge for the inflation target differs by country. The Bank of Korea has a medium-term price stability target of 2% consumer price (CPI) inflation. So in Korea, the Statistics Korea CPI and core inflation seen in Lesson 8 are the basis for monetary policy. So for the same '2% inflation target', you can look for PCE first in US news and CPI first in Korean news.

To sum up, when reading US inflation articles you can separate three things. The number that moves the market first is CPI, the number the Fed targets is PCE, and the number the Fed uses to judge the trend is core PCE. If the Fed chair says at a press conference that "core PCE is still above target", you can read it as meaning they will not rush to cut rates.

STEP 2PPI and pass-through

CPI and PCE are prices consumers pay. But before goods reach store shelves, there is also inflation at the stage where companies buy and sell from each other. Let's go back one step.

PPI is the inflation companies feel

The Producer Price Index (PPI) measures changes in the prices of goods and services that companies produce and sell. In the US it is published by the Bureau of Labor Statistics around the same time as CPI, and in Korea by the Bank of Korea each month. It captures the prices of raw materials such as crude oil, steel and wheat flour, intermediate goods such as parts, and finished products leaving the factory. Consumers cannot see it, but for companies this is their cost.

When commodity prices rise, PPI rises first, and when companies add that burden to their selling prices, CPI and PCE rise after a lag. That is why PPI generally moves earlier and more than consumer prices. Its large weight of raw materials means it takes shocks like oil prices straight on. But consumer prices do not simply rise by as much as PPI. In between, how much companies pass on gets in the way.

When costs rise, who bears them?

When a company adds a cost increase to its selling price and passes it on to consumers, it is called pass-through. When costs rise, a company's choice lies somewhere between two options. Raise prices and pass it on to consumers, or keep prices unchanged and absorb it by cutting its own profit. The 'earnings knob' you learned in Lesson 1 moves here.

Try it yourself with the hypothetical snack company below. Depending on how much costs rise and what percent of that is passed on in the selling price, the consumer price and the company's profit change together.

If you set the pass-through rate to 0%, the consumer price stays the same but company profit falls sharply, and at 100% profit is protected but the consumer price rises by that much. Real companies are mostly somewhere in between. The stronger the brand, the fewer substitutes, or the fewer the competitors, the fewer customers leave when prices go up, so the pass-through rate is higher. This is commonly called 'pricing power', and it is the yardstick that separates strong companies when inflation is rising (continued in Lesson 11).

STEP 3All three inflation gauges on one screen

Now you know what CPI, PCE and PPI each measure. Let's overlay the actual ten-year paths on one chart and see the differences with our own eyes.

How did the three inflation gauges move over ten years?

You can turn lines on and off by tapping the names below. PPI is turned off at first, so turn it on and compare the size. Tap the chart to see that month's numbers.

Three things stand out. First, CPI and PCE move in the same direction, but CPI is usually a little higher. From January 2016 to August 2026, the year-over-year gap between the two averaged about 0.4 percentage points, and in June 2022, when inflation surged, CPI was 9.1% and PCE 7.2%, a gap of nearly 2 percentage points. Second, turn on PPI and the swings are much larger. PPI peaked at 11.6% in March 2022, while CPI peaked three months later, in June, at 9.1%. Third, core PCE moves the most gently, with a high of 5.6% in February 2022. As of August 2026, CPI is 3.4%, PCE 3.4%, core PCE 3.0% and PPI 5.4%, all still above the Fed's 2% target.

The order of inflation releases in a month

Release dates differ slightly from month to month. Please check the Calendar for the exact schedule.

For stocks, it goes like this

The three inflation gauges shake the two knobs from Lesson 1 through different routes. PCE and CPI are used directly in the Fed's rate decisions, so they move the multiple knob through interest rates and discount rates. PPI changes companies' costs and moves the earnings knob. Even the same 'PPI up' news means higher revenue for companies that sell raw materials and margin pressure for companies that buy and use them.

You can check whether rising inflation is favorable or unfavorable for each sector in the impact map of the Macro Map, and the release dates for CPI, PPI and PCE in the Earnings & Economic Indicators calendar.

Just because PPI rose does not mean that sector's profits will necessarily fall or rise. Contract prices, inventory, exchange rates and demand all move together, so you need the habit of checking actual margins in earnings releases.