Personal Consumption Expenditures (PCE) Price Index – Forbes Advisor

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

The personal consumption expenditures price index—better known as the PCE index—is one of the main measures of inflation and consumer spending trends in the US economy. The Bureau of Economic Analysis (BEA) publishes the PCE index each month to track spending and inflation.

Understanding the PCE Index

Prices for goods and services change constantly, rising and falling as companies and consumers react to trends in the economy. The PCE index tracks the consumer side of this dynamic by measuring changes in the cost of living for households—rather than for companies or other economic actors.

It does so by following the prices of a basket of goods and services, each of which has different weightings to reflect how much a typical household spends on it. If the price of gasoline rises, for instance, that has a bigger impact on PCE than if the price of tomatoes goes up because gasoline represents a larger portion of typical consumer spending.

While the PCE index has a lower profile than the consumer price index (CPI), it’s not possible for a few reasons:

  • Core PCE is the Federal Reserve’s preferred measure of inflation, helping to guide the central bank’s monetary policy decisions.
  • Price data for the PCE index comes from surveys of businesses, rather than what consumers say they’re spending on goods and services.
  • The PCE’s basket of goods and services regularly changes to account for substitution—when prices for one item rise, consumers shift their spending to cheaper alternatives.
  • It also measures expenditures on goods and services made on behalf of consumers, like spending on medical insurance by employers or government programs.

How Is PCE Inflation Calculated?

The PCE index is calculated each month based on BEA data on personal consumption expenditures from a wide range of sources including:

  • Statistical reports from the US Census Bureau and other government agencies
  • Administrative and regulatory agency reports
  • Reports from private organizations, such as trade associations

In its analysis, the BEA separates consumer goods and consumer services into three categories:

  • Durable goods. Items that last three years or longer, like cars and trucks, furnishings and household equipment, recreational goods and vehicles.
  • Non-durable goods. Items that last less than three years, like food and beverages, clothing, gasoline and other energy products.
  • Services. Things like housing, health care, transportation, recreation services, restaurants, accommodations, financial services and insurance.

The PCE inflation rate is calculated by adding up the dollar amounts of all goods and services in a basket of goods and services, comparing the total to the prior month’s figures. Some prices must be adjusted based on estimates because the data needed for calculation is only compiled quarterly, whereas PCE inflation is released monthly.

All consumption expenditures data are totaled at the dollar values ​​seen in the various surveys and statistical reports noted above, and then adjusted to current dollar values ​​based on seasonal adjustments and various monthly price indexes.

The BEA normalizes the data via a price deflator—a ratio of the value of all goods and services produced in a particular year at current prices to that of prices that prevail during a base year—to get the monthly PCE index: the average monthly rate of inflation (or deflation) for the US economy as a whole.

Core Inflation vs Headline Inflation

Inflation numbers are generally released in pairs: headline inflation and core inflation. Headline inflation accounts for every good or service included in an index; core inflation excludes food and energy prices as these are very volatile and can change substantially frequently.

This happens for a few reasons, such as when market participants speculate on energy and food and commodity futures. Because this isn’t based on real consumer supply and demand, it doesn’t necessarily reflect inflation in the real economy. That’s why economists often turn to core measures of inflation instead, which rise much more stably.

Core PCE and the Federal Reserve

Core PCE inflation plays a significant role in the US financial system because the Federal Reserve references it to gauge US inflation when setting monetary policy.

In January 2012 the Federal Open Market Committee (FOMC) adopted PCE as its primary measure of inflation over PCI, another leading measure of consumer inflation. The FOMC did so for a few main reasons:

  • PCE adjusts its basket weights as people substitute more expensive goods and services for less expensive ones
  • PCE includes more comprehensive coverage of goods and services
  • Historical PCE data can be revised

PCE vs CPI: What’s the Difference?

CPI and the PCE index both measure US inflation in similar but ultimately different ways.

  • Both measure changes in a basket of goods and services, but the CPI is based on survey data from tens of thousands of consumers instead of reports from businesses on what they sell.
  • CPI doesn’t account for substitution or costs paid by others that consumers benefit from, like employer-sponsored medical costs, making PCE more comprehensive, less volatile and more accurate.
  • CPI is not revised once it’s been published. That’s because the CPI has been calculated using changing methodologies over time, preventing the Bureau of Labor Statistics (BLS) from refactoring historical CPI figures. When the methods for calculating PCE are revised, they are applied to historical data as well.
  • CPI tends to show higher rates of inflation than the PCE index. From January 1995 to May 2013, the average rate of headline CPI inflation was 2.4% whereas headline PCE inflation was 2.0%. Setting both indexes equal to 100 in 1995, CPI inflation was more than 7% higher than the PCE index in May 2013.

Leave a Comment