Inflation: The difference between CPI and PCE explained

• CPI measures prices paid by consumers for a fixed basket of goods and services, including rent, groceries, fuel, and medical care, influencing social security and cost of living adjustments.
• PCE is the Federal Reserve's preferred inflation indicator, used to set interest rate policy, and includes a broader subset of goods/services, reflecting spending by rural households and non-profit organizations.
• The two indices differ in how they weigh goods in their baskets and their calculation methodologies, with PCE allowing for substitution effects when prices change.

The video explains the two primary ways inflation is measured in the US: the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE). It details what each index measures, their importance, and key differences in their scope and calculation methods.