Governments all around the world use methods to measure the changing of prices of various consumer goods and services. CPI and PCE are two methods. The former is a method to measure inflation that is commonly used throughout the world. On the other hand, the latter is used to measure the gaps between the changing prices of consumer goods.
CPI vs PCE
The main difference between CPI and PCE is that though both of the methods are used to understand consumer inflation, they give different weights to the prices of goods. They also differ on the formula they are based on. Though both of these processes have many thing things in common, they differ on significant points.
CPI is a method used by governments to understand the nature of inflation in each of the countries. Each country inspects various sets of data but uses a similar approach. The CPI of a month is usually decided by economists by comparing it to the CPI of the upcoming one. Then the prices of goods are fixed compared to the cost of living for an average family.
PCE is a similar method of measuring inflation. The full form of the term is Personal Consumer Expenditure. This process deals with an individual’s expenses compared to the prices of goods and services. The various surveys done by different businesses are used in this method.
Comparison Table Between CPI and PCE
| Parameters of Comparison | CPI | PCE |
| Full form | Consumer Price Index | Personal Consumer Expenditure |
| Definition | Inflation is calculated by this process. It is commonly used by all governments throughout the world. | This method is used to measure the rise of prices of everyday goods such as clothing, food, transport, entertainment etc. But this method involves only an individual. |
| Base | This method is based on the formula of Laspeyres. | PCE is based on the formula of Fisher-Ideal. |
| Governing body | This method is used by all governments. | This process is used by the United States. |
| Purpose | The CPI applies to a selected list of goods and services. | The PCE is that parameter of measuring goods consumption where it indicates whether a particular good has become expensive and also what is its alternative. |
What is CPI?
The CPI is a method commonly used by all governments to measure inflation. Economists use the comparison method to determine the CPI. This selected list is called a market basket. In every country, the types of goods and services are not the same as the citizens in different countries have different consumption habits and weightings.
To analyse the Consumer Price Index, one needs to evaluate the prices of the goods and services. However, it is to be remembered that the goods and services in the market increase and decreases from time to time. Then the result would be is multiplied by 100 to reach the correct number. In this light, it is to be informed that the CPI is not a percentage.
Although the CPI helps us to provide a clear picture of inflation and how prices are changing, there are a few setbacks in this method. The ‘typical household’ used in the CPI method does not represent every household. The market basket used in the CPI is based on purchases made by a typical household.
The other drawback is that since the goods and services become more expensive, people switch away from them. So the CPI can overstate inflation if people are consuming less due to price increases.
What is PCE?
PCE or Personal Consumption Expenditures refers to the changes in prices in various consumer goods and services in an individual’s household. It is the most popular measurement of the prices of various consumer goods and services. It helps to decide the nature of consumers’ minds.
The PCE indicates what kind of goods every household is purchasing and how much money they are spending. Education or entertainment are also two major aspects of this process. Durable goods such as cars, appliances and other items that last for a long time and non-durable items like fuel fall into this category.
The main difference between the CPI and the PCE is that the latter measures how much money people spend every day, whereas the former shows how prices of these everyday purchases change from months to months.
These consumptions involve purchases done by consumers in sectors like education, health, transport, clothing etc. The PCE majorly contributes to the economic progress of any country.
Main Differences Between the CPI and PCE
- The full form of CPI is Consumer Price Index, and PCE refers to Personal Consumer Expenditures.
- The CPI evaluates the average prices of various consumer goods and services. On the other hand, the PCE is the measurement of expenditures of how much money is spent on everyday purchases.
- The method of CPI is calculated using the formula of Laspeyres, and the PCE is based on the Fisher-Ideal method.
- The changes in the prices of consumer goods and services are indicated by the CPI. On the other hand, the PCE refers to the total amount of money spent by households on final goods and services like food, clothing etc.
- The method of CPI measures the change of prices of goods and services. The PCE reveals how much households spend money on their immediate purchases.
Conclusion
CPI and PCE are two major methods to measure inflation. The economic growth of a country is indicated by both of these methods. The CPI measures the changes in prices of consumer goods and services, but it takes time to catch up to consumption trends. Thus the CPI will not always capture new goods and services. If certain goods increase in price but also increase in their lifetime use, it is not accounted for in inflation.
The PCE, on the other hand, is inversely related to the CPI. If the CPI goes up, meaning that the prices become higher, the PCE goes down as people tend to spend less.
References
- https://www.aeaweb.org/articles?id=10.1257/jep.12.1.3
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=357342