Friday, January 28, 2022

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

 From the Bureau of Economic Analysis:

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....


And more to come