Personal Consumption Expenditures PCE St Louis Fed

Both the PCE Price Index and the Core PCE Price Index (which, again, excludes prices for food and energy) show how much prices change from one period to another. Breakdowns of the PCEPI show price inflation/deflation by category, as well. It may indicate whether prices are inflating or deflating and how consumer spending behavior changes in response.

Consumer Spending Categories

Watching the PCE along with the CPI can give you a more detailed perspective on consumer price inflation. It can help inform your outlook as to whether or not the Federal Reserve may raise or lower interest rates. As an investor, you can use CPI data to help you figure out whether the FOMC is likely to raise, lower, or maintain interest rates, which will have varying effects on the stock market (and your portfolio). The CPI is one perspective you can use to get a big-picture view of the economy as a whole. Bureau of Labor Statistics (BLS), the Consumer Price Index gathers price data on approximately 94,000 goods and services across the country and crunches them into a single number.

Personal Consumption Expenditures Price Index

Personal consumption expenditures, or PCE, allows economists, consumers, and businesses to see how well the economy is faring from month to month. The BEA uses the current dollar value of PCE to calculate the PCE Price Index. As mentioned, PCEPI shows price inflation or deflation that occurs from one period to the next. Personal consumption expenditures (PCE), also known as consumer spending, is a measure of the spending on goods and services by people of the United States.

Moderate PCE growth (around 2-3% annually) signals healthy consumer demand supporting economic expansion. Excessive PCE growth may indicate overheating requiring policy intervention, whilst declining PCE can signal recession risk. This provides insight into demand for products and services, which can help governments and businesses make better informed decisions. It measures how consumers spend their money and whether they save rather than spend.

What Is the Importance of the Personal Consumption Expenditures Number?

This isn’t coincidental but results from fundamental construction differences. The information is provided for general purposes only, and does not take into account any personal circumstances or objectives. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. No representation or warranty is given as to the accuracy or completeness of this information. It does not constitute financial, investment or other advice on which you can rely. Any references to past performance, historical returns, future projections, and statistical forecasts are no guarantee of future returns or future performance.

This comprehensive measure includes price changes for every category of goods and services consumers purchase. Headline PCE reflects complete cost-of-living pressures households face daily, from gasoline to groceries to medical care. The BEA Personal Income and Outlays report releases monthly personal spending and income statistics. The report also includes the latest calculation for the Personal Consumption Expenditures Price Index (PCEPI), which measures price changes and provides a view of inflation.

• Shrinkflation is what happens when prices stay the same—but package sizes get smaller.
• The BEA uses consumer spending to calculate its inflation gauge, the PCE Price Index, which is why measuring and tracking PCE is important.
• Other measures of inflation tracked by economists include the Producer Price Index (PPI) and the Gross Domestic Product Price Index.
• This can provide a view of spending that accounts for more goods and services actually purchased.
• When inflation makes headlines, most Americans hear about the Consumer Price Index.

The FOMC’s primary What is Ripple policy tool is the federal funds rate—the interest rate banks charge each other for overnight loans. This rate serves as the foundation for virtually all other economy-wide interest rates. The indexes use different mathematical formulas to aggregate price changes, reflecting fundamental disagreement about measuring cost of living. While PCE is the Fed’s preferred metric, the Consumer Price Index remains the most prominent public inflation gauge. Understanding precise methodological differences is essential for correctly interpreting economic news and policy decisions.

How does the inflation rate factor into the Fed’s policy decisions?

Prices for goods and services change constantly, rising and falling as companies and consumers react to trends in the economy. When you measure these price changes across an entire economy, that’s the rate of inflation. Published monthly by the BEA, the PCE measures changes in the price of goods purchased by consumers. Rising PCE inflation typically prompts the Federal Reserve to increase interest rates to cool demand and bring prices down. Conversely, falling PCE inflation may lead to rate cuts, stimulating economic activity. Core PCE excludes volatile food and energy prices to reveal underlying inflation trends unaffected by temporary supply shocks.

What is the Fed’s inflation target?

The Fed needs tools providing clearer underlying momentum signals to help predict the future. The PCE choice reflects preference for an index whose entire philosophy aligns with modern central bank operational needs. The CPI, in contrast, is constructed from household surveys designed specifically to measure out-of-pocket costs. While CPI excellently measures typical family cost of living, it’s conceptually separate from national accounting frameworks. This distinction explains why the Federal Reserve—managing the entire macroeconomy—naturally gravitates toward an index intrinsically linked to its broadest economic health measure.

The Federal Reserve’s preference for PCE over alternative inflation measures stems from methodological advantages that enhance policy precision. GDP, making it the most significant single component of economic activity. When the PCE rises, it typically signals economic expansion; a declining PCE often presages a recession.

Federal Reserve policymakers closely monitor the rate of inflation and adjust monetary policy to help steer the inflation rate toward its target while also continuing to promote the goal of maximum employment. The most recent PCE price index data was released on May 31, covering the month of April. The headline April PCE inflation figure was +2.7% year over year, unchanged from the annual rate of +2.7% in March. Although there was no change, generally, PCE inflation has been trending downward since the most recent peak rate of +6.8% in June 2022.

This makes borrowing more expensive throughout the economy, leading to higher mortgage, auto loan, credit card, and business loan interest rates. The goal is cooling demand and bringing inflation back under control. The Fed believes PCE provides more realistic depictions of how inflation actually impacts consumers and the economy. The dynamic nature of its formula and weighting scheme is central to this view.

The BEA also calculates the GDP price deflator, which tracks the amount by which a change in the U.S. gross domestic product (GDP) is caused by price inflation rather than actual growth in goods and services. So, for instance, there could be a situation where gas prices fall, sinking the headline CPI numbers, while food prices rise. When people talk about inflation, they’re usually referring to the Consumer Price Index (CPI). The CPI measures the change in average consumer goods prices over time.

• Consider a scenario where beef prices increase by 15% whilst chicken prices remain stable.
• By removing this statistical “noise,” core PCE allows economists and policymakers to identify persistent inflation trends.
• Core PCE inflation plays an important role in the U.S. financial system because the Federal Reserve references it to gauge U.S. inflation when setting monetary policy.
• PCE also includes spending on behalf of households by third parties, such as employer-paid health insurance and medical care financed through government programs, life insurance expenses, and pension plan expenses.
• The bureau gathers around 64,000 price quotations each month to produce its report.

PCE also consists of spending by nonprofit institutions to provide services to households, household purchases of used goods, and the purchases of goods and services by U.S. residents in foreign countries. The PCEPI is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI. PCEPI also uses a formula that allows for changes in consumer behavior and changes that occur in the short term. According to the Bureau of Economic Analysis (BEA), a U.S. government agency, PCE accounts for about two-thirds of domestic spending and is a significant driver of gross domestic product (GDP). Core PCE inflation plays an important role in the U.S. financial system because the Federal Reserve references it to gauge U.S. inflation when setting monetary policy.

From cereal boxes to paper towels, many products quietly shrink over time while their price tags don’t. It’s a subtle form of inflation that affects your buying power just the same. There are many ways to describe inflation, but people generally think of it as an overall rise in prices. Inflation is when goods and services, across the board, are getting expensive.

Annual core PCE inflation in April also remained unchanged from March’s adjusted reading of +2.8% year over year. The Fed uses the core PCE price index as its preferred measure of U.S. inflation. Shrinkflation is what happens when prices stay the same—but package sizes get smaller.