Frequently Asked Questions

Guidelines for Citing BEA Information | ID: 555 | Created: Nov-03-2010
Answer

What accounts for the differences in the PCE price index and the Consumer Price Index?

Table 9.1U - Comparison of the PCE Price Index with the CPI reconciles the changes in the personal consumption expenditures (PCE) chain-type price index, prepared by the Bureau of Economic Analysis (BEA), with changes in the consumer price index for all urban consumers (CPI), prepared by the Bureau of Labor Statistics (BLS).

The differences between the two indexes can be grouped into four categories: formula effect, weight effect, scope effect, and "other effects."

  • The formula effect accounts for the different formulas used to calculate the two indexes. The PCE price index is based on the Fisher-Ideal formula, while the CPI is based on a modified Laspeyres formula.
  • The weight effect accounts for the relative importance of the underlying commodities reflected in the construction of the two indexes.
  • The scope effect accounts for conceptual differences between the two indexes. PCE measures spending by and on behalf of the personal sector, which includes both households and nonprofit institutions serving households; the CPI measures out-of-pocket spending by households. The "net" scope effect adjusts for CPI items out-of-scope of the PCE price index less items in the PCE price index that are out-of-scope of the CPI.
  • "Other effects" include seasonal adjustment differences, price differences, and residual differences.

For more details, see "Comparing the Consumer Price Index and the Personal Consumption Expenditures Price Index" by Clinton P. McCully, Brian C. Moyer, and Kenneth J. Stewart in the November 2007 Survey of Current Business.

As an example, for the third quarter of 2006, the PCE price index increased 3.0 percent (at an annual rate), while the CPI increased 3.7 percent. The 0.7 percentage-point difference reflected positive contributions from the weight effect (0.84 percentage point), "other effects" (0.29 percentage point), and the formula effect (0.16 percentage point) that were partly offset by the net scope effect (-0.50 percentage point).

The contribution of the weight effect was accounted for by imputed rental of owner- occupied nonfarm housing (0.56 percentage point) and by gasoline and other motor fuel (0.19 percentage point). The contribution of "other effects" was primarily accounted for by seasonal adjustment differences (0.22 percentage point). The contribution of the formula effect was accounted for by gasoline and other motor fuel (0.07 percentage point) and by video and audio equipment (0.05 percentage point). The scope effect from PCE items out-of-scope of the CPI was mostly accounted for by hospital and nursing home services (- 0.36 percentage point) and by "other" (-0.25 percentage point). The scope effect from CPI items out-of-scope of the PCE price index was accounted for by hospitals and nursing home services (0.09 percentage point).

Additional detail on the construction of the PCE price index can be found on the Consumer Spending page.

 

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