One of the key indicators of inflation and changes in consumer spending in the U.S. economy is the personal consumption expenditures price index or PCE index. Each month, the PCE index is released by the Bureau of Economic Analysis (BEA) to monitor spending and inflation.
What is PCE?
One of the three components of the Personal Income and Outlays report is personal consumption expenditures.
Consumers’ personal income is the amount of money they make. Their outlays, or the amount consumers spend, are personal consumption expenditures. The PCE Price Index is derived from the Personal Income and Outlays report’s personal consumption expenditures component. This is the third key part of Personal Income and Outlays, demonstrating whether prices are rising or falling.
Since 2012, the BEA has published personal consumption expenditures in both current and chained dollars. The PCE Price Index is reported based on personal consumption expenditures. Both thoroughly use all PCE categories and eliminate food and energy reported for the index. The Core PCE Price Index is the name of the latter.
The U.S. Federal Reserve used the PCE Price Index as its main inflation measure in 2012 to determine its monetary policy. It is similar to the Consumer Price Index (CPI), which focuses on consumer prices. The Producer Price Index (PPI) and the GDP Price Index are two additional inflation indices that economists keep track of.
How is PCE Calculated?
Every month, the PCE index is produced using BEA data on personal consumption expenditures from a variety of sources, such as:
- Statistics from the U.S. Census Bureau and other governmental organizations
- Reports from administrative and regulatory agencies
- Reports produced by non-governmental entities, such as trade associations
The BEA divides consumer products and services into three groups for its analysis:
- Durable Products. Items that last three or more years, such as cars, trucks, furniture, home appliances, leisure equipment, and vehicles.
- Non-durable Products. Items with three-year shelf life or less, such as food and drinks, clothes, fuel, and other energy sources.
- Services. Such as lodging, health care, transportation, leisure services, dining establishments, financial services, and insurance.
The PCE inflation rate is determined by adding up the dollar prices of all the items in a basket of goods and services and comparing the results to the preceding month’s statistics. Due to the fact that the data required for calculation is only produced quarterly, whereas PCE inflation is published monthly, certain prices must be changed based on estimates.
All data on consumption expenditures are totaled at the dollar amounts found in the aforementioned surveys and statistical reports and are then updated to reflect current dollar amounts taken into account by seasonal adjustments and different monthly price indices.
PCE Price Index (PCEPI) VS. Consumer Price Index (CPI)
The media pays the most attention to the CPI since it is the most well-known economic indicator. However, the Federal Reserve prefers to use the PCE Price Index to assess inflation and the country’s overall economic stability.
The Fed prefers the PCE Price Index; why? This measure includes a wide variety of expenses. Data collected through business surveys, which are often more trustworthy than the consumer surveys used by the CPI, are also weighted into the PCE Price Index. On the other hand, the CPI’s monthly reporting offers more detailed information. When analyzing the data, economists may easily identify categories like cereal, fruit, clothing, and automobiles.
The PCE Price Index uses a methodology that takes into account short-term changes in consumer behavior, which is another distinction between the PCE Price Index and CPI. The CPI calculation does not account for these modifications.
A more complete measure of inflation is produced as a result of these elements. Because even a small amount of inflation may be viewed as a sign of a developing and healthy economy, the Federal Reserve depends on the details that the PCE Price Index shows.
Advantages and Disadvantages of PCE
Data on personal consumption expenditures offer a picture of the state of the economy. People are typically more likely to spend easily when the economy is performing well. Spending reductions indicate issues with the general state of the economy.
Advantages
Compared to the CPI, the PCE Price Index is less widely recognized by the general public. The PCE PI is far more inclusive, whereas the CPI relies on household surveys produced by the Bureau of Labor Statistics (BLS) to assess price trends. This is due to the fact that it incorporates GDP and uses data that is obtained directly from businesses and companies.
The PCEPI considers a wider range of products and services, particularly those bought by all families in the country. Only urban households are included in the CPI.
The CPI, which is affected by significant price changes in some items like gas, is far more volatile than the personal consumption expenditures price index. The PCEPI tames any significant fluctuations.
Disadvantages
The PCEPI has some clear flaws, even though it is the Fed’s favorite measure. The first is that it considers GDP, which is only calculated and reported quarterly. However, the BEA releases a report of the PCE each month. Every month, the agency must use retail sales to overcome the difference.
The PCEPI’s excessive width is another drawback. It uses data from households and other organizations, including companies, governments, and nonprofits. On the other hand, the CPI gives information that consumers directly report.
Takeaways
- The PCE price index is one of the key indicators of inflation and changes in consumer spending in the U.S. economy.
- The PCE Price Index is reported based on personal consumption expenditures.
- The U.S. Federal Reserve used the PCE Price Index as its main inflation measure in 2012 to determine its monetary policy.
- The PCEPI considers a wider range of products and services, particularly those bought by all families in the country.
- PCEPI considers GDP, which is only calculated and reported quarterly.
