The Fed's Inflation Measure

While the media typically cites the consumer price index (CPI) as a measure of "headline inflation," the Federal Reserve prefers the personal consumption expenditures (PCE) price index. The PCE price index measures a broader range of expenditures and adjusts when consumers purchase less expensive alternative products, providing a clearer signal for setting interest rates.

The Fed targets a 2% annual increase in the PCE price index as a healthy rate of inflation. The central bank also looks closely at the core PCE price index, which strips out volatile food and energy costs. It may be surprising that full PCE inflation, which includes food and energy, generally ran lower than core PCE from early 2023 until the spring of 2026, when the Iran war caused surging energy prices.