Core PCE, short for the Personal Consumption Expenditures Price Index excluding food and energy, is the inflation measure the Federal Reserve watches most closely when setting interest rates. It tracks the average change in prices Americans pay for a broad range of goods and services, then strips out the two categories that swing hardest month to month. What remains is a cleaner read on where inflation is actually heading.1U.S. Bureau of Economic Analysis. Personal Consumption Expenditures Price Index, Excluding Food and Energy
What the PCE Index Measures
The Personal Consumption Expenditures Price Index is compiled by the Bureau of Economic Analysis as part of the GDP calculation. It captures roughly two-thirds of all domestic final spending in the United States.2Bureau of Economic Analysis. NIPA Handbook Chapter 5 Personal Consumption Expenditures
The basket is wide. Durable goods like cars and appliances. Non-durable goods like clothing and groceries. Services covering everything from healthcare to legal advice. And unlike some other inflation measures, the PCE counts not just what households pay out of pocket but also what gets paid on their behalf, including employer-provided health insurance, Medicare, and Medicaid.3Federal Reserve Bank of Cleveland. Infographic on Inflation: CPI versus PCE Price Index
Why Food and Energy Are Excluded
Food and energy prices move for reasons that often have little to do with the broader economy. A drought spikes grocery bills. A supply disruption sends gasoline up 20% in a month. These shocks are real, but they tend to be temporary.
If the Fed reacted to every oil price jump by adjusting interest rates, it would be chasing noise. Filtering those categories out reveals the slower-moving price pressures building across the rest of the economy, and that’s the signal policymakers want. The result is what economists call “core” inflation.1U.S. Bureau of Economic Analysis. Personal Consumption Expenditures Price Index, Excluding Food and Energy
The Formula That Sets PCE Apart
The PCE uses a Fisher-Ideal formula, which statisticians call a “superlative” index because it accounts for how consumers actually change what they buy when prices shift.4Bureau of Labor Statistics. Differences Between the Consumer Price Index and the Personal Consumption Expenditures Price Index When beef gets expensive, people buy more chicken. The formula captures that switch by continuously updating the weights of items in the basket.
A fixed-basket approach assumes shoppers keep buying the same mix regardless of price. That assumption overstates inflation. If steak doubles and everyone shifts to chicken, a fixed basket keeps measuring steak as though people are still eating it nightly. The chained, Fisher-Ideal method the BEA uses avoids that distortion.5U.S. Bureau of Economic Analysis. What Accounts for the Differences in the PCE Price Index and the Consumer Price Index
How Core PCE Compares to the CPI
Most people hear about inflation through the Consumer Price Index, published by the Bureau of Labor Statistics. The CPI and PCE track similar territory but differ in ways that consistently produce different readings.
Scope is the first split. The CPI measures out-of-pocket spending by urban households only. The PCE covers all households, urban and rural, and includes spending done on their behalf by employers and government programs.3Federal Reserve Bank of Cleveland. Infographic on Inflation: CPI versus PCE Price Index That difference matters most for healthcare. The CPI captures what you pay at the doctor’s office; the PCE also counts what your insurer, employer plan, and Medicare paid on your behalf, giving healthcare a bigger weight in the PCE.
Housing is the second. Shelter costs make up roughly 35% of the CPI, giving rent and home prices outsized influence over the headline number. Because the PCE covers a wider range of goods and services, housing’s share is smaller, so a single sector can’t dominate the reading.3Federal Reserve Bank of Cleveland. Infographic on Inflation: CPI versus PCE Price Index
Formula is the third. The CPI uses a Laspeyres formula with a relatively fixed basket, while the PCE uses the Fisher-Ideal approach that adjusts for substitution.4Bureau of Labor Statistics. Differences Between the Consumer Price Index and the Personal Consumption Expenditures Price Index Over time, this tends to make PCE inflation read slightly lower than CPI inflation.
Why the Fed Uses Core PCE
Congress gave the Federal Reserve a dual mandate in 1977: promote maximum employment and stable prices.6Board of Governors of the Federal Reserve System. The Dual Mandate and the Balance of Risks The PCE became the Fed’s preferred inflation gauge in 2000, and in January 2012 the Federal Open Market Committee formally defined its inflation target as 2% annual growth in the PCE price index.7Board of Governors of the Federal Reserve System. Federal Reserve Issues FOMC Statement of Longer-Run Goals and Monetary Policy Strategy
The Fed favors PCE for the practical reasons above: wider scope, a formula that reflects real consumer behavior, and less dominance by any single sector. The core version adds one more thing. By filtering out food and energy volatility, it gives Fed officials a cleaner view of where inflation is trending over the medium term. That distinction matters when deciding whether to raise or lower rates. A temporary gasoline spike shouldn’t trigger a rate hike that takes months to ripple through the economy. Persistent price increases across services, housing, and manufactured goods probably should.
The Limitations of Core PCE
Excluding food and energy sounds logical, but it’s a blunt tool. Research from the Federal Reserve Bank of Dallas has found that some food and energy components are actually quite stable and carry useful signal, while some non-food, non-energy items are volatile and add noise that Core PCE doesn’t filter out.8Federal Reserve Bank of Dallas. Which Core to Believe? Trimmed Mean Versus Ex-Food-and-Energy Inflation
The same research found that Core PCE has historically tended to read below headline PCE inflation over time. An alternative measure known as the trimmed mean PCE, which removes whatever items are most volatile in a given month regardless of category, tracks headline inflation more closely.8Federal Reserve Bank of Dallas. Which Core to Believe? Trimmed Mean Versus Ex-Food-and-Energy Inflation
There’s also the fact that people do buy food and energy. Households spending a large share of income on groceries and gasoline experience real inflation that Core PCE doesn’t reflect. The measure was never designed to capture what any individual family feels at the checkout counter. It’s a policy tool, built to help central bankers see through short-term price swings. That’s a strength for monetary policy and a limitation for anyone trying to understand their own cost of living.
Where To Find the Data
The BEA publishes Core PCE monthly in its Personal Income and Outlays report, released about four weeks after the reference month ends.9U.S. Bureau of Economic Analysis. Personal Income and Outlays, January 2026 Both month-over-month and year-over-year changes are available directly from the BEA.1U.S. Bureau of Economic Analysis. Personal Consumption Expenditures Price Index, Excluding Food and Energy
The year-over-year figure drives headlines and Fed commentary. It compares the current month’s index level to the same month a year earlier, smoothing seasonal patterns and giving a clearer picture of sustained inflation. When a news report says “Core PCE came in at 2.8%,” that typically refers to this annual comparison. The month-over-month figure is useful for spotting emerging trends but bounces around more and gets less weight from policymakers.