This article gives a fascinating look at consumer spending based on CPI data and how it works alongside lesser-known PCE data. Consumption has shown a "resilience" despite the recent tax increases and higher gas prices. Personal consumption is estimated to grow at 3% annual rate during the first quarter. The article goes on to explain CPI versus PCE. PCE is personal consumption expenditures which is calculated monthly and is used to calculate real consumer spending. The article explains the math in depth, but the short of it is that using the PCE index rather than CPI adds 0.7% growth without inflation to real consumption and real incomes. The Fed considers the PCE index superior to CPI data because PCE reflects the cost of living more accurately. Because of the recent the divergence of CPI and PCE (usually at 0.3%, currently 0.7%), this has slowed core CPI inflation to below mandated levels. The problem with this is that it causes higher real interest rates. Unfortunately, actual inflation does not affect real rates, but rather the consumer's interpretation of CPI (expected inflation), so with this
In all, the inflations expectations working with PCE have validated the current monetary policy, which is great for real incomes and spending.
http://www.economist.com/blogs/freeexchange/2013/03/divergence-between-cpi-and-pce-prices
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