A measure of inflation based on changes in personal consumption. Unlike the CPI, which is based on a fixed basket of goods, the Personal Consumption Expenditures (PCE) Deflator finds the average increase in prices for all domestic personal consumption. PCE Deflator has been shown to be a more comprehensive and consistent gauge of inflation in the US.

Price changes may cause consumers to switch from buying one good to another. Whereas the fixed-basket CPI does not account for altered spending habits caused by price changes, the PCE Deflator's ability to account for such substitutions makes it the preferred measure of inflation for the Federal Reserve. Thus, changes in the PCE offer insight on the direction of future monetary policy.

On a Technical Note: In reality, the CPI and PCE Deflator report very close figures. On average the two differ by about 0.3% annually, with the CPI tending to overstate inflation and the PCE understating it.