The inflation index of the United States has always been a topic of concern in the international financial market. Inflation is one of the dual functions of the Federal Reserve. Rising inflationary pressure will force the Fed to tighten monetary easing more quickly. Before discussing this issue, we must first understand that the so-called inflation can be either the Consumer Price Index (CPI) or the PCE Prize Index. Because the performance of the two economic indicators is quite different, clarifying their previous differences will help us better understand the Fed's decision.

CPI is the most widely used inflation indicator. However, in 2000, the Federal Reserve completed the transition from CPI to PCE-the US Open Market Committee (FOMC) no longer published their expectations of CPI, and began to put forward their views on inflation prospects in the form of PCE.

Then why does the Fed prefer PCE prices to CPI? Aneta Markowska, an economist at Societe Generale, pointed out in a newly released research report:

The Federal Reserve has conducted a lot of analysis, and the results show that PCE has many advantages over CPI, including: first, the composition of expenditure can better reflect the actual behavior of consumers; Second, the component of PCE is more extensive; Thirdly, PCE can be modified according to the latest information and improved measurement methods.

The "basket" of CPI is fixed, while PCE allows substitution effect, which often leads to lower price level. The close relationship between scale and weight also plays a very important role. Consumer price index only calculates the price paid by families, while PCE includes goods and services paid on behalf of families.