Consumer Price Index versus Personal Consumption Expenditures Price Index

20 Aug Consumer Price Index versus Personal Consumption Expenditures Price Index

US Captial DomeCongress uses the consumer price index to adjust many figures in the Bankruptcy Code. For example, Chapter 13 debt limits are adjusted every three years using the consumer price index. Economists often quote the consumer price index “CPI” as support when they report on the economy. The personal consumption expenditures price index “PCE” has recently been showing up in news reports when the government announces that the rate of inflation is a modest 5-6%. Ben Bernanke, Chairman of the Federal Reserve, announced on January 1, 2008,that the Federal Reserve would henceforth use a different measure,the less familiar PCE figure, instead of the CPI, as a basis for economic decisions. What is the difference between these two measures of economic activity?

Both the CPI and PCE calculated by start with data on the retail prices a long list of typical goods and services purchased by a hypothetical typical consumer. The raw data differentiates between urban and rural areas and between different regions of the country. In arriving at a single figure such as the 5% annual rate of increase in consumer prices between June 2007 and June of 2008, the number crunchers in Washington take into account population distribution and weight the increase (or decrease) in cost of items in a particular category by the percentage that category occupies in a “typical” budget. The weighting factors are different for the CPI and PCE. CPI uses a complex “chained” smoothing function to adjust for seasonal and short-term variations in statistics.

The Consumer Price Index is compiled by the Bureau of Labor Statistics (also thesource of figuresused in the bankruptcy “means test“). The PCE is calculated by a different agancy,the Bureau of Economic analysis. The PCE, which is more geared toward long range fiscal planning than the well-being of individuals, produces consistently lower inflation rates than the CPI.

Photoby J-Fi from Flickr.com

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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