The Bureau of Economic Analysis reported Thursday that the personal consumption expenditures price index, the PCE, rose 3.7% in the first quarter of this year. What does that number mean, and why does it matter?

“You can think of it like one big shopping cart for all Americans,” said economist Claudia Sahm at the Jain Family Institute. Sahm said the PCE measures the price of the goods and services we consume, whether we pay for them ourselves or not.

At the doctor’s office, the copay comes out of your pocket. But if you have insurance, that pays the rest. The PCE includes both. Sahm said higher demand pushed up the prices in the PCE basket. She has her own example.

“A lot of people need to go buy clothes to get back to work, and frankly, like myself, a lot of us need clothes that are of a larger size than we were wearing the last time we went to work,” she said.

The PCE is the Federal Reserve’s favorite inflation snapshot. The PCE’s flashier cousin, the CPI, or consumer price index, only measures what we pay for ourselves.

“The reason they look at the PCE instead of the CPI is the PCE is a more accurate measure of the whole market basket of what we consume,” said Stephen Cecchetti, an economist at Brandeis University.

Kathy Bostjancic, an economist at Oxford Economics, said the PCE also tracks consumers who buy chicken when the price of, say, beef rises. 

“The PCE price index will capture that switch to the lower-cost good.”

The Fed needs an accurate inflation gauge like the PCE to know when it needs to raise interest rates to cool off the economy.