The Fed uses one inflation gauge as its North Star. Here's why
The Federal Reserve is expected to raise interest rates soon from rock-bottom levels to cool inflation.
The Personal Consumption Expenditures Price Index jumped by 5.8% in December from the year prior, tied for the fastest pace since June 1982, the Bureau of Economic Analysis said Friday.
Fed officials prefer this inflation metric over others as the North Star guiding their policy response. The U.S. central bank uses it to grade whether it's on track to hit its 2% inflation target, according to economists.
But why is this the preferred gauge?
Like the perhaps-better-known Consumer Price Index, the PCE Price Index reflects the prices Americans are paying for a basket of goods and services, and how those costs change over time.
But the barometers differ in two key ways.
For one, the PCE Price Index has a broader scope than its CPI cousin.
More from Personal Finance:Why the stock market hates the idea of rising interest ratesMost Americans want Biden to prioritize student loan forgivenessWhat to do if you win the $421 million Mega Millions jackpot
The latter looks at households' out-of-pocket costs, while the PCE Price Index examines a broader swath of the cost ecosystem, according to economists.
Take health care, for example: The PCE Price Index accounts for costs incurred by government programs like Medicare and Medicaid, as well as private insurers, where CPI does so just for health costs that directly impact Americans' wallets, according to Josh Bivens, research director at the Economic Policy Institute.
«The larger scope is one virtue [of the PCE Price Index],» Bivens said.
«When the Fed is looking at inflation, they're less concerned with what is happening to the living standard of the household; they want to know the
Read more on cnbc.com
