Macro Note 10
The Federal Reserve says it seeks 2 percent inflation over the longer run as measured by the PCE price index, not CPI, because PCE is constructed to account for how Americans are spending at a given time and adapts more quickly to spending-pattern changes.
Why this note matters
The CPI is more familiar to most readers, so the Fed's use of PCE can look like an arbitrary preference. The official Fed and BEA explanations show a narrower point: PCE is the index the Fed uses for its target because of how the measure is constructed and what it is designed to capture.
The Federal Reserve says it seeks to achieve inflation at a 2 percent rate over the longer run as measured by the annual change in the price index for personal consumption expenditures, or PCE. That is the target definition the institution itself uses.
So when readers compare monthly CPI headlines with the Fed's target language, they are already comparing related but not identical inflation measures. The first analytical step is to keep the benchmark consistent with the policy target being discussed.
The Fed's own explanation says PCE is constructed in a way that accounts for how Americans are spending their money at a given time and more quickly adapts to changes in spending patterns. That is the official reason it gives for preferring PCE to CPI in the target framework.
BEA reinforces the same logic from the data-production side, saying the PCE price index reflects changes in consumer behavior and captures inflation across a wide range of consumer expenses. The overlap between those two descriptions is the key point, not a casual preference for one headline over another.
CPI is still an important inflation release and often moves markets on the day it prints. But the Fed's target language is anchored to PCE, which means readers should be careful when translating a CPI surprise directly into statements about the exact distance from the policy benchmark.
For Hynexly, the practical rule is simple: cite CPI when the market reaction is about CPI, and cite PCE when the discussion is about the Fed's formal inflation target. That keeps the narrative aligned with the official measurement frame.
The Federal Reserve states its 2 percent inflation target in PCE terms and explains why it uses PCE rather than CPI.
Open sourceBEA explains what the PCE price index measures and notes that it reflects changes in consumer behavior across a wide range of consumer expenses.
Open source