One month, two inflation rates: 3.4% and 3.7%. Which one does the Fed watch?

On 12 August it was reported that US inflation in July was 3.4%. On 26 August it was reported that US inflation in July was 3.7%.

Neither is wrong. They are two different official gauges, for the very same month, and the central bank is judged on the second one only.

Two measurements, two names

The first is the consumer price index, the familiar CPI, published by the Bureau of Labor Statistics. That is the one in the headlines.

The second is the personal consumption expenditures price index, the PCE, published by the Commerce Department. For July it rose 0.2% on the month and 3.7% over the year, one tenth above expectations. Core PCE, which strips out food and energy, came in at 3.3%, exactly in line with forecasts.

Look at the second row, because that is where the substance sits. In core inflation the distance between the two gauges is eight tenths of a point. That is not rounding. It is the difference between a number approaching the target and a number still far from it.

Why they differ

They do not measure the same basket in the same way. Three structural differences do the work:

1. Different weights. Shelter takes a far larger share of the CPI than of the PCE. When rents move, the CPI feels it several times over.
2. Different scope of spending. The CPI measures what a household pays out of its own pocket. The PCE also counts what is spent on its behalf, healthcare paid by insurers and employers being the clearest example.
3. Different treatment of substitution. The PCE updates its weights more often, so it captures the fact that people change habits when something becomes expensive. The CPI holds a steadier basket.

Historically those differences make the PCE run slightly below the CPI. Until the autumn of 2025 that is exactly what happened: in September core PCE stood at 2.8% and core CPI at 3.0%.

From late 2025 the relationship reversed, and the distance widened month after month until the eight tenths of July. This is not the quirk of a single month, it is something that has held for three quarters.

July itself hints at where the pressure sits: goods prices fell 0.1%, with petrol and other energy goods down 2.7% and household furnishings down 0.9%.

Which one the central bank watches

The PCE. The 2 percent target is defined on the PCE, not on the CPI.

That changes how the headlines should be read. When you see that inflation eased to 3.4%, you are looking at a number the Fed does not use to measure its own success. The number that counts for it is 3.7%, and for diagnosing the trend, the 3.3% core reading.

The same holds in Europe under different names. The European Central Bank targets the harmonised index, the HICP, which has its own rules for housing and does not coincide with the national indices that appear in the news.

What the Fed chair said two days later

On 28 August, in his first Jackson Hole speech as chair, Kevin Warsh said inflation remains too high and left open the possibility that rate increases may be needed in the coming months.

The phrasing worth noting was different. He acknowledged that recent readings show some cooling, then added that they do not tell him underlying trends have meaningfully improved. In other words, he is not reading the month, he is reading the series. Markets took it without panic, with the indices holding their levels, while bonds moved to price an increase later in the year rather than in September.

For anyone holding bonds, that shift in expectation matters more than the index itself, because their prices move with the rates considered likely, not with the rate that applies today.

What is your own inflation rate

Neither of the two.

Both gauges describe an average household that does not exist. If you pay rent, your basket looks more like the CPI. If your home is paid off, shelter barely touches you and your personal rate is lower. If you drive a lot, July with its cheaper fuel was a better month for you than for the average.

The practical consequence for an investment is simple and does not depend on which index you pick. The return that matters is what is left after inflation, and the full explanation of inflation shows why a difference of one point a year changes the picture dramatically across a decade. The Investment Calculator makes it visible with your own numbers, and compound interest explains why the gap widens rather than staying fixed.

What to take away

• Two official gauges for the same month can disagree, and in July they disagreed by eight tenths in the core measure. Before comparing two percentages, check whether they measure the same thing.
• The 2 percent target is defined on the PCE. The headline number is not the number the central bank is judged against.
• An index describes an average household. Your own basket, and therefore your own real return, is always a little different.