Which price index excluding food and energy is closely watched by the Federal Reserve?

The price index excluding food and energy that is closely watched by the Federal Reserve is the core PCE price index.

PCE stands for personal consumption expenditures. Produced by the Bureau of Economic Analysis, the PCE price index tracks prices paid for goods and services consumed by households, including some expenses paid on consumers’ behalf, such as employer-provided medical care. Its broader coverage differs from the Consumer Price Index, which focuses mainly on households’ out-of-pocket purchases.

The “core” version removes food and energy because those categories can swing sharply with weather, geopolitical events, harvests, oil production and other temporary supply shocks. Economists use it to get a clearer reading of persistent inflationary pressure, although food and energy still matter to household budgets.

A common mix-up is confusing core PCE with core CPI. Both exclude food and energy, but the Federal Reserve’s preferred inflation gauge is the PCE measure. The Fed officially targets 2% inflation over the longer run, measured by the annual change in the overall PCE price index, while core PCE is an important underlying trend indicator.