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Abstract:
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Inflation is a key economic indicator reflecting the health of an economy. Its impact on measuring economic health is amplified by its use as an adjustment on other economic variables: real GDP, real wage growth, etc. There are a number of components to inflation estimation, and the methodology for each can differ, leading to different inflation estimates. The Consumer Price Index (CPI) and Personal Consumption Expenditures Price Index (PCE) are two U.S. inflation metrics that use different methodology, and therefore produce different estimates. According to the Bureau of Economic Analysis (BEA), the differences can be grouped into four effects: formula, weight, scope, and 'other.' This research evaluates two effects, weight and scope, and discusses their implications. The weight effect is a result of differences in how consumer expenditure data is sourced. CPI sources data from consumers, while PCE sources from businesses. The scope effect is a result of the different types of expenditures CPI and PCE track. For example, CPI only tracks out-of-pocket consumer medical expenditures, but PCE also tracks expenditures made for consumers, thus including employer contributions.
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