Which inflation index is the Federal Reserve's preferred measure for its 2% target?

The inflation index used for the Federal Reserve’s 2% target is the personal consumption expenditures (PCE) price index.

The Federal Open Market Committee defines its longer-run inflation goal as 2% measured by the annual change in the PCE price index. The Bureau of Economic Analysis produces the index as part of the National Income and Product Accounts. It covers prices of goods and services consumed by households, including purchases made on consumers’ behalf, such as some medical services paid by employers or government programs.

The Consumer Price Index is also an important inflation gauge, but it uses a different basket and methodology. PCE weights can adjust more readily when consumers substitute one product for another, and its coverage is broader in several areas. The GDP deflator covers domestically produced output, while the Producer Price Index focuses on prices received by producers.

The Fed often discusses core PCE, which excludes food and energy because those prices are volatile. However, the formal 2% objective refers to headline PCE inflation over the longer run.