How Inflation Is Measured: CPI, PCE, and the Art of the Basket

A practical guide to the main inflation measures—what each one counts, who it covers, and how the basket of goods is built and adjusted.

Every measure of inflation, right now

Each of these is a real, published inflation rate. They disagree because they count different things.

Measure	Latest	What it counts
CPI-U — headline	3.5%	The number reported as "inflation". All goods and services, all urban consumers.
Core CPI	2.7%	The same basket with food and energy removed, because those swing hardest month to month. It is what the Fed watches for the trend — and what a household notices least, since food and fuel is where prices are felt.
PCE price index	3.7%	The measure the Federal Reserve actually targets. Weighted differently from CPI and counting spending made on a household’s behalf, such as employer health premiums, it usually reads below the headline.
Core PCE	3.3%	PCE with food and energy removed. This is the specific number the Fed’s 2% target refers to.
Chained CPI	3.5%	Assumes people substitute when prices rise — buying chicken when beef gets expensive. It therefore reads lower than headline CPI, and the gap between them is exactly the substitution argument.
CPI-W	3.5%	Urban wage earners and clerical workers only. This is the one that sets the Social Security cost-of-living adjustment, so it decides real payments to 70 million people.
Shelter	3.4%	Housing costs, about a third of the basket.
Food	3.1%	Groceries and eating out.
Energy	14.4%	Fuel, electricity and gas.
Medical care	2.2%	Health services and supplies.
Average hourly earnings	3.1%	Private-sector pay. Set against headline CPI it shows whether wages are keeping up.
Real wage growth	-0.4%	Average hourly earnings minus headline CPI — pay growth after inflation has taken its cut.

July 2026 · US Bureau of Labor Statistics and Bureau of Economic Analysis. Index-based measures are shown as the change from a year earlier; rates are shown as published.

Each measure over the last ten years

CPI-U — headline 3.5%

The number reported as "inflation". All goods and services, all urban consumers.

Core CPI 2.7%

The same basket with food and energy removed, because those swing hardest month to month. It is what the Fed watches for the trend — and what a household notices least, since food and fuel is where prices are felt.

PCE price index 3.7%

The measure the Federal Reserve actually targets. Weighted differently from CPI and counting spending made on a household’s behalf, such as employer health premiums, it usually reads below the headline.

Core PCE 3.3%

PCE with food and energy removed. This is the specific number the Fed’s 2% target refers to.

Chained CPI 3.5%

Assumes people substitute when prices rise — buying chicken when beef gets expensive. It therefore reads lower than headline CPI, and the gap between them is exactly the substitution argument.

CPI-W 3.5%

Urban wage earners and clerical workers only. This is the one that sets the Social Security cost-of-living adjustment, so it decides real payments to 70 million people.

Shelter 3.4%

Housing costs, about a third of the basket.

Food 3.1%

Groceries and eating out.

Energy 14.4%

Fuel, electricity and gas.

Medical care 2.2%

Health services and supplies.

Average hourly earnings 3.1%

Private-sector pay. Set against headline CPI it shows whether wages are keeping up.

In short

The CPI-U is the headline inflation number, covering 93% of the population and including all goods and services.
Core measures (core CPI and core PCE) remove food and energy to show the underlying trend, but they are not 'real' costs—they're analytical tools.
The PCE is the Fed's target, and it differs from CPI by including spending made on your behalf, like health insurance paid by an employer.
The chained CPI assumes you substitute cheaper products when prices rise, which makes it a lower number than standard CPI.
Shelter is the heaviest weight in the CPI basket, and it's mostly an estimate (owners' equivalent rent), not a direct price.
Both substitution and hedonic quality adjustments reduce the reported inflation rate relative to a simple fixed basket of goods.

The Main Measures and What Each One Counts

Different inflation numbers exist because each one answers a different question. Here is what the major measures count and who they cover.

CPI-U (Consumer Price Index for All Urban Consumers): Tracks prices for everything a typical urban household buys—food, housing, transportation, medical care, and more—covering about 93% of the U.S. population. This is the headline CPI you see in the news.
Core CPI: The same as CPI-U but with food and energy prices removed. These categories swing wildly with weather and oil supply, so core is meant to show the underlying trend. The Fed and many economists watch this closely.
PCE (Personal Consumption Expenditures Price Index): The Fed's preferred measure. It also tracks consumer spending, but is weighted differently and includes spending made on a household's behalf—like employer-paid health insurance premiums—which CPI doesn't count. Over time, PCE has shown slightly lower inflation than CPI.
Core PCE: Strips out food and energy from the PCE, just like core CPI does for the CPI. The Fed's official inflation target—2% per year—is stated in terms of core PCE.
Chained CPI: A version of CPI that assumes consumers substitute cheaper goods when prices rise—like switching from beef to chicken. Because of this, it runs a little lower than regular CPI and is used to adjust tax brackets and Social Security benefits.
CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers): Covers only households where more than half of income comes from wage or clerical jobs. It's a narrower group than CPI-U, and it's the measure used to calculate the annual Social Security cost-of-living adjustment (COLA).

How the Basket Is Built and Adjusted

Every measure starts with a fixed list of goods and services—the 'basket'—and then applies a series of tweaks to reflect real-world behavior. Here's what goes into the process.

Weights from surveys: The basket's composition is based on detailed surveys of what households actually spend—from rent and groceries to haircuts and airline tickets. These weights are updated periodically, usually every other year or so for CPI, and more often for PCE.
Shelter is the big one: Housing accounts for roughly a third of the CPI basket. Because most people own their homes, the price is not an actual transaction—it's 'owners' equivalent rent' (OER), an estimate of what a homeowner would pay to rent their own house, surveyed from actual rental markets.
Substitution adjustment: This assumes people change their buying habits when relative prices shift—more chicken, less beef. Applied historically via the chained CPI, it pulls the reported rate down compared to a basket that never changes.
Hedonic quality adjustment: When a product gets better—say, a laptop with more memory—the statistician tries to strip out the value of the improvement to measure pure price change. If the upgrade is judged to be worth $100, then a $50 price increase is counted as a $50 decrease.
These adjustments are contested, and critics argue they serve to lower the reported inflation rate.

Common questions

Why are there so many different inflation rates?

Each measure answers a slightly different question. CPI-U tells you what the typical urban household experiences in cash out-of-pocket costs. Core CPI and core PCE strip out volatile food and energy to reveal trends. Chained CPI adjusts for how people change spending. The Fed targets core PCE because it most fully captures actual consumption patterns.

Which inflation rate is the official one?

There is no single official number. The Bureau of Labor Statistics produces CPI-U and CPI-W, which are used for Social Security adjustments and tax bracket indexing. The Bureau of Economic Analysis produces PCE, which the Federal Reserve uses for its 2% target. Financial headlines typically cite year-over-year CPI-U.

Why does the CPI exclude food and energy for 'core' inflation?

Food and energy prices bounce around with harvests, weather, and oil shocks, which can obscure the long-run trend. Core inflation is a signal, not a bill—it tells you what inflation might look like in the future once those short-term shocks fade. This is why the Fed watches it, even though you still have to pay for gasoline and groceries.

What is 'owners' equivalent rent' and why is it used?

Most people own their homes, but they don't pay rent, so there's no monthly transaction to track. Instead, the Bureau of Labor Statistics surveys what homeowners would pay to rent their own house—that's owners' equivalent rent. It's a proxy for the cost of shelter, and it's the largest single component of CPI, making its accuracy crucial.

Does chained CPI really make inflation look lower?

Yes. By assuming consumers shift to cheaper alternatives when prices rise, chained CPI runs about 0.2 to 0.3 percentage points lower than regular CPI-U. That's why it's used for some government adjustments—it saves money in benefit payments and tax bracket moves. But it has critics who say it understates the burden on people who can't easily substitute.

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