In August 2026, US consumer prices were 3.4% higher than a year earlier. The two official inflation measures agreed on that. Leaving out food and energy, the two split. The consumer price index (CPI) showed 2.4%. The personal consumption expenditures (PCE) price index showed 3.0%.
The Federal Reserve's 2% inflation target is set on PCE. Here is what PCE inflation is, how it differs from CPI and why the Fed prefers it.
What is PCE inflation? PCE inflation is the yearly change in the personal consumption expenditures (PCE) price index. It tracks the prices of everything US households consume, including what employers and the government pay for on their behalf.
The Fed's 2% target has been set on headline PCE since January 2012. Core PCE, which leaves out food and energy, shows the trend underneath.
PCE gives health care about twice the weight CPI does. It gives housing less than half.
In August 2026, core PCE inflation was 3.0%, against 2.4% for core CPI.
What PCE measures
The PCE price index comes from the Bureau of Economic Analysis (BEA), the agency that measures US gross domestic product (GDP). It is published near the end of each month, about two weeks after CPI for the same month.
Personal consumption expenditures are all the money spent on goods and services for US households. That includes what households pay out of their own pocket. It also includes what others pay for them, such as health insurance from employers and care paid by Medicare and Medicaid. In 2025, that spending came to $20.9 trillion.
Like CPI, PCE comes in two versions. Headline PCE covers everything. Core PCE leaves out food and energy, whose prices jump around. The Fed's target is on headline PCE. Core is a guide to the trend. We explain the difference in Core vs Headline Inflation.
How PCE differs from CPI
Both measures track the prices households face. We explain CPI in What Is CPI? The main differences:
CPI | PCE | |
|---|---|---|
Published by | Bureau of Labor Statistics | Bureau of Economic Analysis |
Released | Mid-month | About two weeks later |
Covers | What urban households pay out of their own pocket | All household consumption, including what others pay for |
Weights updated | Once a year | Every month |
Revised later | Only its seasonal adjustment, once a year | Yes, with each release |
Source: US Bureau of Labor Statistics; US Bureau of Economic Analysis
The biggest difference is what each one counts. CPI counts only what urban households pay out of their own pocket. PCE adds what is paid on their behalf, with health care the largest part. That changes the weights.
Source: US Bureau of Labor Statistics; US Bureau of Economic Analysis; YX Insights
Housing is 35.3% of CPI but 15.9% of PCE. Health care is 8.3% of CPI but 17.1% of PCE. So a rise in rents moves CPI about twice as much as PCE. A rise in hospital prices moves PCE about twice as much as CPI.
The weights also change at different speeds. CPI updates its weights once a year. PCE updates them every month. When people switch from something expensive to something cheaper, PCE picks up the switch quickly.
Why the Fed prefers PCE
In 2000, the Fed began to forecast inflation on PCE in its reports to Congress, in place of CPI. In January 2012, it made 2% a year on headline PCE its formal inflation target.
The reasons follow from the differences above:
Coverage. PCE includes the health care households use but do not pay for directly.
Weights. Monthly weights follow how spending actually changes.
Consistency. Revisions keep the history consistent, so a reading from 2012 can be compared with one from 2026.
How core PCE and core CPI split in 2026
From January 2000 to August 2026, core PCE inflation ran above core CPI in only 20% of months. Since November 2025, it has done so every month.
Health care is one part of the gap. In the year to the second quarter of 2026, health care prices in PCE rose 3.1%, according to the BEA. Medical care prices in CPI rose 2.4%, according to the Bureau of Labor Statistics. PCE gives health care about twice the weight, so the faster rise lifts PCE more.
How core PCE has tracked the 2% target
Source: FRED (PCEPILFE); YX Insights
The chart shows core PCE inflation each month since the target was set. The dashed line is 2%. The target itself is on headline PCE. Core is shown because it moves more steadily.
From 2012 to 2019, core PCE averaged 1.6% a year. It sat below 2% in 95% of months. Since March 2021, it has been above 2% every month, 66 months in a row. It peaked at 5.6% in September 2022. In August 2026, it was 3.0%.
On 16 September 2026, the Fed raised interest rates for the first time since 2023. Its statement said inflation had been above target for more than five years. We explain how rate rises work on inflation in Interest Rates and Inflation.
How to read a PCE report
A few numbers in each release carry most of the information:
Headline PCE, year on year. This is the number the 2% target is set on.
Core PCE, year on year. It leaves out food and energy, so it shows the trend underneath.
Core PCE, month on month. A monthly rise of 0.17% adds up to about 2% over a year. Several months well above that point to inflation staying above 2%.
Revisions to earlier months. A large revision can change the picture as much as the new month.
PCE arrives after the CPI report and the producer price report for the same month.
PCE tracks all household spending, including what others pay for. That gives health care more weight than in CPI. It gives housing less. The Fed's 2% target is set on PCE. When the two disagree, as in 2026, PCE is the one measured against that goal.
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