The Personal Consumption Expenditures (PCE) price index measures the prices people in the United States pay for goods and services.
The Bureau of Economic Analysis (BEA) produces the PCE price index.
The change in the PCE price index is known for capturing rising (or falling) prices across a wide range of consumer goods and services and reflecting changes in consumer behavior.
For example, if the price of butter and eggs goes up, consumers may buy less butter and eggs.
The Core Personal Consumption Expenditure (PCE) price index tracks changes in the prices of goods and services bought by consumers for their own use, but excludes food and energy.
What is PCE?
The PCE price index measures inflation in the U.S., tracking the change in prices of goods and services purchased by consumers.
The PCE Price Index is like the Consumer Price Index (CPI) from the Bureau of Labor Statistics.
The two indexes are made differently and serve different purposes, so their inflation rates are different.
Between the two, the PCE price index is the preferred gauge of inflation by the Federal Reserve.
What’s the difference between PCE and CPI?
In the U.S., there are two primary measures of inflation:
- Personal Consumption Expenditures Index (PCE) released by the Bureau of Economic Analysis (BEA)
- Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS)
Why the need for two?
While both indices use a basket of goods to measure inflation, there are some differences between them:
Comprehensiveness
The CPI only looks at the money spent out of pocket on goods and services.
It does not include other costs that are not directly paid for such as medical care paid for by employer-provided insurance, Medicaid, or Medicare).
All of these are included in the PCE.
Formula
The PCE is less volatile than the CPI because the way it is calculated smooths out these price swings.
Prices that go up and down a lot, like airfare and fuel, are more likely to change the CPI formula.
Data Sources
The PCE gets its information from the GDP report and from suppliers, while the CPI gets its information from surveys of households.
The PCE also tracks how much all U.S. households and nonprofits spend on goods and services. The CPI only looks at households in cities.
Why is the PCE the Fed’s preferred measure of inflation?
The PCE has a wider range of goods and services that are covered.
It’s also responsive to what to include or exclude n the basket of goods and services.
For example, if the price of milk goes up, and people buy less milk, the PCE uses a new basket of goods that accounts for people buying less milk.
In contrast, the CPI is less responsive to changes in consumer preferences.
PCE data can be revised more than CPI data, which can only be adjusted for seasonal factors and for the five years before.
In summary, the PCE includes a broader range of goods and services from a broader range of buyers than the CPI. It attempts to track what is actually purchased and represents how consumers’ purchasing patterns change when relative prices change.
This results in smoother price changes in the PCE.