reader Bruce Hall wrote:
Interestingly, since PCE is always 2 percentage points lower than CPI.
This struck me as a surprisingly stylized fact that was inconsistent with what I knew from the various analyzes I conducted. I wrote that the difference from 1986 to 2019 was about 0.45 percentage points.Mr Hall then quoted Morning Star Report Description:
At its peak in the summer of 2022, CPI inflation was almost a full 2 percentage points higher than PCE inflation (9.0% vs. 7.1%).
Well, I certainly can't deny that's the case. However, one has to wonder about this statement:
Interestingly, since PCE is always 2 percentage points lower than CPI.
I don't think a one-month inflation difference of 1.87 percentage points constitutes “sustained.”
To confirm this, here are the 12-month inflation rates from 1986 to 2024 (after the Great Stability Period):
figure 1: CPI 12-month inflation rate (blue), PCE deflator (tan). NBER-defined recession peak-to-trough dates appear gray. Sources: BEA, BLS, FRED, NBER, and author's calculations.
To me, the adjective “consistent” doesn't seem appropriate. By the way, the maximum difference is 1.87 percentage points (one month). Next month it is 1.83.
What will the difference look like over time? As shown in Figure 2, the red dashed line represents the (average) differential value for 1986-2024M03. The red dashed line is obtained by regressing the CPI inflation rate minus the PCE deflator inflation rate.
figure 2: CPI-PCE deflator 12-month difference (black). The red dotted line is the average value from 19986-2024M03. NBER-defined recession peak-to-trough dates appear gray. Source: BLS, BEA, NBER, and author's calculations.
Now, is CPI really a “better” measure of the cost of consumer goods and services? Yes, it may be the costs faced by consumers rather than the costs of goods and services consumed by households (remember that for some things, such as health care, consumers do not face all costs). On the other hand, we know that the CPI is quasi-Laspeyres (while the PCE deflator is chain-weighted). This base weighting issue is minimized to some extent because the CPI has adopted annual changes in certain weights, bringing it closer to the month-on-month weighted CPI.
Anyway, this review Slightly outdated, but mostly applicable (except frequency of CPI weight changes).
