Barclays Economics Research Team reports that the gap between headline and core CPI and PCE is growing further apart (see Figure 1). The difference between the two data points is important because TIPS are indexed to CPI, while the Federal Reserve communicates monetary policy in terms of PCE. So, what is driving the divergence? The U.S. Bureau of Economic Analysis (BEA) writes that the differences stem from three factors: formula effect, weight effect and score effect. At this time, the weight effect (see Figure 3) is contributing most to the gap. Specifically, shelter cost and owners’ equivalent rent (OER) are causing the largest differences. CPI gives these factors a 31.6% weight, while PCE gives them only 15.6% (see Figure 2). Barclays doubts the gap between CPI and PCE will change the FOMC view that inflation measures are firming and that any rise in the Fed Funds rate will be very gradual and shallow.