What is the PCE (Personal Consumption Expenditures) Index?

Views 1119 Nov 4, 2024

In the United States, there are two main indicators for tracking the prices consumers pay for goods and services. There's the Consumer Price Index (CPI), managed by the Bureau of Labor Statistics (BLS), and a second one, the Personal Consumption Expenditures (PCE) price index, created by the Bureau of Economic Analysis (BEA). These indices are calculated using different methods and often show different trends over time.

In this article, we'll focus on the PCE. Read on to learn more.

What is the Personal Consumption Expenditures (PCE) price index

So how can you define PCE?

The Personal Consumption Expenditures (PCE) index is a measure of the value of goods and services purchased by U.S. residents. BEA publishes PCE estimates on a monthly, quarterly, and annual basis. This price index is known for reflecting changes in consumer behavior and capturing inflation or deflation across a wide range of consumer expenses.

The BEA has categorized the PCE into three consumer goods buckets. This includes durable goods (goods that will be used for at least three years), nondurable goods (good with a shelf life of less than three years) and services (commodities that cannot be stored or inventoried).

Breakdown for September PCE (Personal Consumption Expenditures) Report

The PCE price index rose by 0.2 percent, while excluding food and energy, it increased by 0.3 percent. Real disposable personal income (DPI) saw a 0.1 percent increase in September, and real personal consumption expenditures (PCE) increased by 0.4 percent. Goods experienced a 0.7 percent increase, and services increased by 0.2 percent.

Source: Personal Income and Outlays, September 2024 | U.S. Bureau of Economic Analysis (BEA)

How Personal Consumption Expenditures (PCE) works

PCE tracks how much consumers spend on goods and services, including durable goods, nondurable goods, and services. It's calculated using data from businesses, trade organizations, and the gross domestic product. PCE is used to measure inflation; the Federal Reserve uses the PCE Price Index (PCEPI) to also measure it. PCE figures can also impact business decisions about hiring, investments, and offerings.

PCE includes spending by the institutionalized population, domestic military personnel, and US citizens working abroad. It excludes spending by students, temporary workers, and foreign nationals working for international organizations or other countries.

To track when the PCE will be announced, investors can go to moomoo's Financial Calendar as well as other numbers, including earnings and economic data.

The PCE Price Index: Why it matters

Here's some reasons why the PCE price index is important.

Represents the Federal Reserve's preferred measure of inflation in the United States; it's used to set interest rate policy.
Reflects how consumers change their spending habits in response to price changes. For example, if gas prices increase, the PCE will show if consumers drive less and spend less on fuel.
Used by economists and analysts to predict future spending and economic growth.
Utilized by companies to understand their business needs for products and services, which can affect hiring and investing.
Based on data from surveys of businesses, rather than what consumers say they spend. The PCE includes expenditures made on behalf of consumers, such as health insurance paid for by employers.

How is PCE calculated

The PCE index is calculated using data from businesses, trade organizations, and the gross domestic product (GDP). The BEA uses data from the U.S. Census Bureau, private trade organizations, and regulatory agencies to estimate what goods and services were sold in a given time period.

Here's the calculation.

Add up the dollar value of all goods and services in a basket of goods and services
Compare the total to the previous month's figures
Normalize the data using a price deflator

Durable goods

Durable goods are tangible products that have an average useful life of at least three years. Examples of durable goods include cars and furniture. According to BLS data, durable goods typically make up around 13% of the PCE.

Nondurable goods

Non-durable goods are items consumed quickly, like food, clothing, and gasoline, making up a larger portion of consumer spending compared to durable goods like cars and appliances. This makes up 22% of the PCE.

Services

Services are commodities that cannot be stored or inventoried. They are usually consumed at the place and time of purchase. This includes housing, healthcare, transportation, recreation services, restaurants, accommodations, financial services, and insurance. This represents approximately 65% of the PCE.

How PCE price index impacts inflation

The PCE Price Index impacts inflation in a few ways:

Formula: Allows consumers to substitute items based on their relative prices, which can cause the PCE to grow more slowly.
Weighting: Weighs items differently than the Consumer Price Index (CPI), which can lead to lower measured inflation.
Core PCE: Excludes food and energy prices, which can make it easier to see the underlying inflation trend. The Federal Reserve closely monitors the core PCE index.
Median PCE inflation rate: Excludes all price changes except for the one in the center of the distribution of price changes. This can be useful for estimating the underlying trend in inflation and forecasting future inflation.

The Relationship between Core PCE and the Federal Reserve

The Federal Reserve closely monitors the Personal Consumption Expenditures Price Index (the core PCE price index) excluding food and energy, when making monetary policy decisions. The core PCE is the Federal Reserve's preferred inflation measure for a number of reasons, including:

Broader range of spending: Covers a wider range of spending than other indexes.
Better reflects consumer spending by showing how consumer spending changes, such as when people choose substitute goods due to price changes.
Excludes volatile categories such as food and energy, which tend to have more dramatic price swings than other items.
Source material and weighting make it a preferred inflation measure.

Potential pros and cons of PCE

Potential pros

Accounts for changing spending habits: PCE's weights are updated more frequently to reflect how consumers spend money as their preferences and habits change. For example, if the price of bread increases, people may buy less bread, and the PCE will use a new basket of goods that reflects this.
Broader coverage: PCE provides a broader view of the economy by reporting aggregate spending on a wide range of goods and services.
Preferred by the Federal Reserve: The Federal Reserve has used PCE as its primary measure of inflation since 2000.

Potential cons

Revisions: PCE can be substantially revised, which can lead to variations in outcomes over time.
Data collection and categorization errors: PCE may reflect errors in data collection and categorization.
Understates inflation: PCE may understate inflation because it includes large third-party expenditures that lower the relative weights of other item categories.
Excludes some factors: PCE only reflects produced goods and services, and excludes certain volatile categories and other factors that can reflect the state of the economy

Personal Consumption Expenditures (PCE) vs Consumer Price Index (CPI)

While both the Personal Consumption Expenditures (PCE) and Consumer Price Index (CPI) measure inflation, the key difference with the PCE meaning is that PCE takes into account the broader spending patterns of all households, including those made on their behalf by employers or government programs, while CPI focuses solely on the out-of-pocket spending of urban consumers; PCE often reflects a slightly lower inflation rate than CPI.

Key points about the differences:

Scope: PCE considers all goods and services consumed by households, including those purchased by employers like health insurance, while CPI only looks at what consumers directly buy out-of-pocket.
Data source: CPI gathers data directly from consumers, whereas PCE draws data from business spending within the GDP report.
Federal Reserve preference: The Federal Reserve typically uses the PCE as its preferred measure of inflation due to its broader scope.

Here's an example using healthcare. If an employer pays for an employee's health insurance, this would be included in the PCE calculation but not the CPI, as the employee doesn't directly pay for it.

FAQs about Personal Consumption Expenditures (PCE)

When is the PCE Released?

The Personal Consumption Expenditures (PCE) price index is released monthly by the Bureau of Economic Analysis (BEA) on Fridays at 12:30 PM ET. The PCE report is usually released about two weeks after the producer price index (PPI) and the CPI reports.

What does a high or low PCE mean?

A high personal consumption expenditure (PCE) level usually indicates a higher inflation rate, while a low PCE level may indicate a lower inflation rate

How does PCE show inflation?

PCE measures inflation by tracking the price changes of goods and services consumed by households and nonprofit institutions. The core PCE price index excludes food and energy prices, which are known to fluctuate more frequently and dramatically than other prices. The Federal Reserve closely monitors the core PCE price index when making monetary policy decisions.

How does PCE affect the economy?

The PCE index has a significant impact on the economy as it reflects consumer spending patterns, which account for a substantial portion of overall economic activity. When the PCE index rises, it often indicates increased consumer demand, suggesting that people are spending more on goods and services. This surge can lead to higher production levels, job creation, and ultimately, economic growth. A declining PCE may signal reduced consumer confidence and spending, potentially leading to slower economic growth or even recession.

How does PCE relate to GDP?

Personal Consumption Expenditures (PCE) is a key component of Gross Domestic Product (GDP) and is used to measure how much people spend on goods and services in the United States.

How does the core PCE price index affect the USD?

The Core Personal Consumption Expenditure (PCE) Price Index can affect the US Dollar (USD) in a number of ways:

A higher-than-expected core PCE reading: Can indicate inflation, which may cause investors to seek safer investments like the USD. This can strengthen the USD relative to other currencies. It can also cause investor uncertainty, which may lead to traders seeking safer investments like the USD.
A lower-than-expected core PCE reading: Can reduce inflation concerns, which may lead investors to take on more risk. This may favor higher-yielding currencies over the USD.
The PCE Price Index is the Federal Reserve's preferred gauge of inflation. The Fed uses interest rates to achieve its goals of price stability and full employment. When inflation is above the Fed's target, the Fed raises interest rates, which helps the USD value.