Why does the Fed use PCE over CPI?
Consumers aren't the only economic participants impacted by a change in the Fed rate.... Inflation has WIDE ranging implications from the future liabilities of pension funds to the ongoing cost of our national debt.  It doesn't make sense to consider only consumer inflationary experience.  PCE is considered because it relates to consumption, which includes things paid for by other entities, like employer healthcare spend. (the average person doesn't care nor are they affected by how much their employer spends in healthcare) It may be true that the average person doesn't care how much their employer spends on healthcare, but it's not true that we aren't affected.  From an employer's perspective, healthcare, wages, and all other benefits are part of the cost of having an employee.  When healthcare goes up, it increases the total employee cost.   Employers can handle this in several ways.  They could reduce the amount they give investors (as dividends, stock buybacks, etc.).  But then the stock is worth less and they have to make up the money somewhere else.  They could pass the expense on to customers.  But then the loss in business can easily cost more than the revenue raised.  They can cut wages or other benefits.  Then the average person will start caring...and might get a different job.   (I found this article saying that 12M households spend >=50% of income on rent, so I'm assuming that an even greater number spend more than the recommended 30%, which means rent should be weighted as high as it is in CPI.) According to the census, that's only about 10% of households.  It also notes that 64.4% of households are owner-occupied.  They don't pay rent.  The CPI makes up a number called owner's equivalent rent for those households to get to the higher percentage.   The CPI is intended for things like wages.  This makes it a good choice for a cost of living adjustment, but it doesn't quite represent the overall economy.  And for investments, it's the broader economy that matters.  Household consumption is less important.   What the Fed says. The reason is in your own question. The answer is simple. They use that code to tax the product otherwise it would just be out of pocket expenses.
Regardless of your thoughts on what was happening in late 2012, financial prices should not be used as the sole barometer of a recovery...this is why the Fed uses tons of macroeconomic data, not just that BAC has been up 20% in the last 6 months.   My point is if you are going to tout what seems to be a market timing model, where the authors are proud of the fact that the entire thing is data mined,  you need strong out of sample evidence (over a few business cycles) that it works.  Nothing here comes close QE was started by Ben Bernanke's FED who was appointed by GWB. The FED is a separate entity from politics regardless of all the attempts to gain control. No politician came up with QE and most didn't support it.   Why would Dems or the GOP run on a program that an independent and privately run central bank created? Do you even understand what the FED is or how monetary policy is set? "It's very hard to measure the worth of an abstract concept like money, particularly over long periods of time. In the modern era we have things like the Consumer Price Index (CPI) in the United States, where the Bureau of Labor Statistics literally sends ""shoppers"" out to find prices of things and surveys people to find out what they buy. This results in a variety of ""indexes"" which variously get reported by media outlets as ""inflation"" (or ""deflation"" if the change in value goes the other way). There are also other measurements available like the MIT Billion Prices Project which attempt to make their own reading of the ""worth"" of currencies. Those kinds of things are about the only ways to measure a currency's change in ""value to itself"" because a currency is basically only worth what one can buy with it. While it isn't ""all the world's currencies combined"", there is a concept of the International Monetary Fund's ""Special Drawing Rights (SDR)"", which is a basket of five currencies used by world central banks to help ""back"" each other's currencies, and is (very) occasionally used as a unit of currency for international contracts. One might be able to compare the price of one currency to that of the SDR, or even to any other weighted average of world currencies that one wanted, but I don't think it's done nearly as often as comparing currencies to the basket of goods one can buy to find ""inflation"". Even though one might think what would be important to measure would be overall Money Supply Inflation, much more often people care more about measuring Price Inflation. (Occasionally people worry about Wage Inflation, but generally that's considered a result of high Price Inflation.) In order to try to keep this on topic as a ""personal finance"" thing rather than an ""economics"" thing, I guess the question is: Why do you want to know? If you have some assets in a particular currency, you probably care most about what you'll be able to buy with them in the future when you want or need to spend them. In that sense, it's inflation that you're likely caring about the most. If you're trying to figure out which currency to keep your assets in, it largely depends on what currency your future expenses are likely to be in, though I can imagine that one might want to move out of a particular currency if there's a lot of political instability that you're expecting to lead to high inflation in a currency for a time." You can compare your salary increases to the CPI in your county to ensure your pay is at least keeping up with the increase in goods and services in your country. You can also compare your salary with the average wage growth in your country. But you also want to make sure that any savings or investments you may have are also keeping up with, or even better, beating CPI. This will make sure that your savings/ investments are growing in real terms. Investopedia has this note where you'd want the contrapositive point: The interest rate, commonly bandied about by the media, has a wide and   varied impact upon the economy. When it is raised, the general effect   is a lessening of the amount of money in circulation, which works to   keep inflation low. It also makes borrowing money more expensive,   which affects how consumers and businesses spend their money; this   increases expenses for companies, lowering earnings somewhat for those   with debt to pay. Finally, it tends to make the stock market a   slightly less attractive place to investment. As for evidence, I'd question that anyone could really take out all the other possible economic influences to prove a direct co-relation between the Federal Funds rate and the stock market returns.  For example, of the dozens of indices that are stock related, which ones would you want that evidence: Total market, large-cap, small-cap, value stocks, growth stocks, industrials, tech, utilities, REITs, etc.  This is without considering other possible investment choices such as direct Real Estate holdings, compared to REITs that is, precious metals and collectibles that could also be used. This was such a wonderful and clear explanation. It has helped me to understand (at 28) a concept that I have always been a bit murky on. I would feel safe making the bet that you are a teacher of some sort. I would find it extremely interesting to hear you thoughts on why we don't use the gold standard anymore. Do you work in finance? I have read this at least a dozen times, and watched several documentaries on it, but this is the clearest explanation yet. Thank you.  I had not really considered the possibility that the fed is not the evil monster it's usually frame as before. Now I'm not sure how bad it is due to these conflicting viewpoints. The worst case I have heard against it (repeatedly) is that it's a privately owned corporation. And that it's for-profit. What is that about? Well, there are also cases where inflation actually helps you, individually, as a consumer. For example, if you have a mortgage or any other debt, debtors benefit from the value of a dollar today decreasing tomorrow.  In a very general sense, psychologically you want to avoid deflationary periods as well as it tends to seize up an economy (why would I spend a dollar today if it will be worth more tomorrow?).  Sure, the absolute value of a dollar decreases over time, but this is intentionally designed to diminish the value of hoarding cash today. Standard income should rise approximately with the rate of inflation, so from an absolute purchasing power standpoint you should remain approximately neutral.