CPI and PCE: Past and Present

By: Amanda Sanfilippo

The Consumer Price Index (CPI) represents the average of the prices consumers pay for certain items such as food, energy, and medical care (U.S. Bureau of Labor Statistics, n.d.c). Personal Consumption Expenditure (PCE), the preferred method used by the Fed when formulating its policies, is a measure of prices paid for durable and nondurable goods as well as other services related to food and energy (U.S. Bureau of Economic Analysis, n.d.). Both indices focus on changes in national consumer spending and inflation. Rather than focus on one particular item, this is an overview of all the possible elements included in either index. Coinciding with the World Health Organization’s declaration of the COVID-19 pandemic and the lockdowns back in March of 2020, both CPI and PCE experienced negative percent changes month to month (AJMC, 2021). However, we have experienced a dramatic increase in these indices as we approach the end of 2021. The latest update for CPI came in October, when one of the largest increases of the year occurred. Seasonally adjusted, this marks a 0.9 percent increase from September. As seen in Figure 7, not seasonally adjusted, it has risen to 6.2 percent over the past 12 months. More recently reported data have shown an even further increase to 6.8 percent. In fact, according to CNBC, the last time this index increased at such a rapid pace was more than 30 years ago — of course, three decades ago, consumers were not slowly recovering from an ongoing pandemic. For the most part, rising spending on energy, shelter, and vehicles has caused the recent steep rate. This is a slight change from back in August, when the biggest culprits were food and energy (Cox, 2021). The Biden administration is aware of rising inflation concerns; however, the president appears to be relying on the Fed to take care of it (Smialek, 2021) while his Build Back Better legislation is stalled in Congress.

Figure 7: CPI 12 Month Percent Change (NSA)

Source: Bureau of Labor Statistics

Figure 8: Monthly Percent Change of CPI & PCE

Source: BLS & BEA

The Bureau of Economic Analysis update for October was a percent change of 0.6 from the previous month. Although still high and a cause of concern among consumers, the change is actually lower than most economists expected (Winck, 2021). The last update from September was a 0.4 percent change: the same as CPI. The disparity between PCE and CPI values is due to the way the values are collected — via business surveys (Liberto, 2021). The percent changes throughout the past nine months have not been fluctuating as wildly as we have seen from the CPI. Last spring, it was observed that consumers were purchasing more goods overall (U.S. Bureau of Economic Analysis, 2021). This uptick may be the result of pent-up demand, stimulus payments and other fiscal measures, and the availability and public administration of vaccines.

Figure 9: Monthly Percent Change of CPI & PCI

Source: BLS & BEA

Because CPI and PCE both measure inflation, albeit in different ways, it is common for them to mimic each other, at least directionally. Most of the time, CPI has percent changes that are larger than those of PCE, although as we can see in Figures 8 and 9, there are cases of intersection. Considering just 2021, CPI’s peaks and valleys have been much more volatile. Because these increases have become a serious issue, on Oct. 6, 2021, the Fed discussed leaving interest rates around zero as well as slowly ending the bond policy that was put in place during the pandemic. The Fed will not yet jump to raising interest rates because it wants to see whether inflation can turn around with these minor adjustments in place (Horsley, 2021). With continuing supply chain issues surrounding this holiday season, both of these measures likely will see increases at least for the next few months (Winck, 2021). In light of the newly announced COVID-19 variants, shopping habits may see another vast change, for better or worse.

Amanda Sanfilippo ’21

Major: Business Analytics Hometown: Shelton, CT

REFERENCES

AJMC. (2021, January 1). A timeline of Covid-19 developments in 2020. https://www.ajmc.com/view/a-timeline-of-covid19developments-in-2020 Cox, J. (2021, September 14). Consumer prices post smaller-thanexpected increase in August. CNBC. https://www.cnbc.com/2021/09/14/consumer-price-indexaugust-2021.html Cox, J. (2021, November 10). U.S. consumer prices jump 6.2% in October, the biggest inflation surge in more than 30 years. CNBC. https://www.cnbc.com/2021/11/10/consumer-price-indexoctober.html Horsley, S. (2021, November 3). Inflation is at a 30-year high. Here’s how the Federal Reserve plans to deal with it. NPR. https://www.npr.org/2021/11/03/1051478945/federal-reserveinflation-jobs-employment Liberto, D. (2021, November 20). Personal consumption expenditures (PCE). Investopedia. https://www.investopedia.com/terms/p/pce.asp#pce-priceindex-pcepi-vs-consumer-price-index-cpi Smialek, J. (2021, November 10). Fastest inflation in 31 years puts more heat on Washington. The New York Times. https://www.nytimes.com/2021/11/10/business/economy/ consumer-price-inflation-october.html U.S. Bureau of Economic Analysis. (n.d.). Personal consumption expenditures price index. Retrieved November 29, 2021, from https://www.bea.gov/data/personal-consumptionexpenditures-price-index U.S. Bureau of Economic Analysis. (2021, May 28). Personal income and outlays, April 2021. https://www.bea.gov/news/blog/2021-05-28/personalincome-and-outlays-april-2021 U.S. Bureau of Labor Statistics. (n.d.a). Bureau of Labor Statistics data (1 month). Retrieved November 29, 2021, from https://data.bls.gov/timeseries/CUSR0000SA0&output_ view=pct_1mth U.S. Bureau of Labor Statistics. (n.d.b). Bureau of Labor Statistics data (12 months). Retrieved November 29, 2021, from https://data.bls.gov/timeseries/CUUR0000SA0&output_ view=pct_12mths U.S. Bureau of Labor Statistics. (n.d.c). CPI home. Retrieved

November 29, 2021, from https://www.bls.gov/cpi/ Winck, B. (2021, October 29). Inflation looked less transitory in September as the global supply chain crisis pushed prices higher. Business Insider. https://www.businessinsider.com/ pce-inflation-september-price-growth-supply-chain-crisiseconomic-recovery-2021-10 Winck, B. (2021, November 24). Inflation rises sharply in October, prompting more fears of a price-growth crisis. Business Insider. https://www.businessinsider.com/pce-inflation-october-pricegrowth-supply-chain-energy-crisis-economy-2021-11