Economy
How will the Inflation Reduction Act change the IRS?

When Americans consider rising and falling prices, the focus is often on the national inflation rate. However, there are many ways that American consumer costs can be assessed. Another primary metric of the cost of goods and services is the Personal Consumption Expenditures Price Index (PCE), prepared by the Bureau of Economic Analysis (BEA).
The PCE is a monthly assessment of the prices people pay in the United States for goods and services across a wide range of consumer expenses. Much like the Consumer Price Index (CPI), produced by the Bureau of Labor Statistics (BLS), the PCE reflects changes and insights in consumer behavior.
Both the CPI and PCE examine the state of consumer prices in the United States. They are released monthly and offer a “core” price index that excludes the most volatile categories: food and energy, whose prices tend to swing up and down more often than other prices..
However, they also have distinct differences that can lead to varying assessments of inflation.
For example, the CPI is based on the Consumer Expenditure Survey conducted by the Census Bureau. The PCE is based on multiple Census surveys focused on businesses, such as the Service Annual Survey and the Quarterly Services Survey[1]. The PCE and CPI also use different mathematical formulas to analyze data.
You are signed up for the facts!
These methodological differences mean that the PCE measures the change in goods and services consumed by all households and the nonprofit institutions serving them. As a result, the PCE provides insights into items and expenditures that are outside the scope of the CPI.
A good example is medical care services. The PCE includes services that are paid for on behalf of consumers through employer-provided health insurance and programs like Medicare and Medicaid. In comparison, the CPI’s Consumer Expenditure Survey data only asks about household out-of-pocket expenses and health insurance costs.
As a result of these differences, the Federal Reserve closely monitors the “core” PCE index when making decisions regarding inflation mediation and interest rates. Prior to 2000, the Fed typically relied primarily on the CPI.
The Fed prefers PCE for several reasons: it reduces substitution bias, more accurately captures consumer behavior, is fully revised when methodological changes are made, and has a broader scope that captures more of the economy.
Much like the measurements provided by the CPI, the PCE illustrates the process of recovering from a period of peak inflation rates.
The PCE index rose by 3.5% between August 2022 and August 2023, a slight increase from the 3.4% growth from July 2022 to July 2023. Overall, the pace of inflation is slowing since its peak in June 2022. However, inflation remains more than a full percentage point higher than the Federal Reserve’s stated goals. The BEA reports that August reflected a $47 billion increase in service spending and a $36.7 billion increase in goods spending.
The “core” PCE index declined to 3.9% in August.
Beyond inflation indicators, the PCE also provides insights into how Americans spend their earnings.
In August, American personal consumption expenditures increased by $83.6 billion over July, the highest monthly level of spending so far in 2023. BEA reports that the largest contributors to this spending increase were transportation services, healthcare, and motor vehicles and parts.
Americans’ personal income also increased by $87.6 billion. Additionally, personal saving as a percentage of disposable personal income was measured at 3.9%. Both figures mark an increase from July.
Explore data on economic indicators, read about the current state of the American economy, and get the latest updates by signing up for our newsletter.
The CPI provides a weighted assessment of prices Americans pay for a representative basket of consumer goods and services across 32 geographic areas. The PCE’s formula is similar, but constructed differently, and better incorporates the concept of “consumer substitution” — the economic theory that as prices rise or incomes fall, consumers tend to replace costlier items with more affordable alternatives. However, this data can be challenging to measure in real-time.