Greg Ip: Fed prioritizes PCE inflation gauge over CPI measure

Greg Ip: Fed prioritizes PCE inflation gauge over CPI measure
Fed targets PCE over CPI

The U.S. Federal Reserve chooses to target the Personal Consumption Expenditures (PCE) inflation measure instead of the Consumer Price Index (CPI) due to its closer relationship with monetary policy's direct influence over nominal demand.

Greg Ip explains that inflation reflects the gap between nominal demand and the volume of goods and services, essentially represented by nominal PCE divided by real PCE. According to Ip, a comprehensive inflation measure like PCE is necessary to accurately gauge the effects of monetary policy.

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