PCE Deflator
The Federal Reserve's preferred inflation measure, tracking price changes across personal consumption expenditures.
What is PCE Deflator?
The Personal Consumption Expenditures (PCE) price index, commonly called the PCE deflator, is the Federal Reserve's preferred measure of inflation in the United States. Published monthly by the Bureau of Economic Analysis (BEA), it tracks price changes for goods and services consumed by US households and nonprofit institutions. The PCE deflator differs from the CPI in three important ways: it uses a chain-weight formula that adjusts for consumer substitution (replacing expensive goods with cheaper alternatives) rather than a fixed basket, it covers a broader range of spending including healthcare paid by employers and insurers on behalf of households, and it includes rural areas excluded from the CPI. The Federal Open Market Committee (FOMC) targets 2% annual core PCE inflation (excluding food and energy) as its price stability mandate.
Example
Core PCE inflation peaked at 5.6% year-over-year in February 2022, well above the Fed's 2% target. In response, the Federal Reserve raised the federal funds rate from near-zero in March 2022 to 5.25%–5.50% by July 2023—a cumulative tightening of 525 basis points. Core PCE gradually declined through the tightening cycle, returning close to the 2% target by mid-2024, supporting the Fed's assessment that its restrictive policy stance was successfully restoring price stability.