What inflation metric is preferred by the Federal Reserve?

The preferred inflation metric by the Federal Reserve is the Core Personal Consumption Expenditures (PCE) Price Index. This index measures the prices of a wide range of goods and services consumed by households, while excluding food and energy prices, which can be quite volatile. The Federal Reserve values the Core PCE because it provides a clearer indication of underlying inflation trends without the noise of temporary price fluctuations in food and energy markets.

The Core PCE is particularly important to the Fed as it aligns closely with its dual mandate to promote maximum employment and stable prices. By focusing on this measure, the Fed can better assess whether inflation is trending toward its target rate, allowing for informed decisions regarding monetary policy.

Other inflation metrics such as the Consumer Price Index (CPI), Headline CPI, and Producer Price Index (PPI) are useful but often contain more variance due to their inclusion of more volatile categories or different scopes of measurement. The CPI, for instance, is commonly referenced but includes all items, including food and energy, which may not accurately reflect long-term inflation trends. Similarly, the PPI measures wholesale prices rather than consumer prices, making it less relevant for the Fed's consumer-focused mandates. Thus, the Core PCE stands out as the most relevant