The personal consumption expenditures price indicator, or PCE tracks the prices U.S. consumers pay for goods and services. The PCE, like the consumer price index, focuses on the impact of changing prices on households and not companies or producers.
The PCE not only tracks what goods and services people buy, but also how they change their spending habits as prices rise or fall. The PCE will show if consumers are forced to reduce their fuel consumption due to rising gas prices.
The Bureau of Economic Analysis publishes the PCE every month. The most recent PCE update released by the bureau on Jan. 27 shows that the PCE price index rose 0.1% in December. Core PCE, which excludes fuel and food — two categories that are subject to price swings frequently — rose 0.3% in December.
The December release showed an increase in PCE of 0.1%, and a core PCE rise of 0.2%.
The Federal Reserve prefers to measure inflation using core PCE. An increase in PCE or core PCE could signal an increase in inflation. A decrease in PCE may indicate a decrease in inflation.
These results show an increase in inflation but things are cooling down. Core PCE rose 4.4% in December compared to December last year. This is down from 4.7% annually in November. Inflation is still increasing, but at a slower pace.
How does PCE calculate?
The BEA calculates this index by using data from trade organizations and businesses, as well as the gross domestic product. The GDP is the sum of all goods and services that were produced in the United States during a quarter.
The U.S. Census Bureau provides a lot of data for producers and businesses. The Census Bureau’s quarterly services reports, annual retail trade surveys, and monthly retail trade survey are used by the BEA. It also relies on reports from regulatory agencies and private trade organizations. The BEA can use these reports to estimate the sales of goods and services over a certain time period.
The BEA splits consumer goods into three categories:
Durable goods are goods that can be used for at most three years. This includes furniture and motor vehicles.
Non-durable goods are goods with a shelf life less than three years. This category includes gasoline, food, beverages, and clothing.
Services such as housing, utilities, and insurance.
The BEA then takes all the consumption data and calculates how much consumers have spent on these goods. It also considers taxes and retailer markups.
PCE vs. CPI
However, there are many differences between these two indexes. The BEA calculates the PCE using data from businesses. The Bureau of Labor Statistics calculates the CPI using household survey data. The CPI only measures urban consumers’ spending habits, while the PCE represents rural and urban consumers’ spending.
The CPI is used to cover out-of-pocket costs for consumers. However, the PCE accounts for purchases made by consumers on behalf of businesses, government programs, or non-profits. For example, medical care covered under an employee’s employer-linked health insurance.
Inflation measures are often measured using both the CPI or the PCE. Economists prefer the PCE to measure inflation.
When will the PCE be released?
Monthly, the PCE is published in the BEA Personal Income and Outlays Report. The February 24th Personal Income and Outlays report will be available.