Personal Consumption Expenditures Price Index
Contents
The Personal Consumption Expenditures (PCE) price index is a key measure of inflation in the United States. It's the preferred inflation gauge for the Federal Reserve when making monetary policy decisions, such as setting interest rates.
Key Characteristics of the PCE Price Index
| • | Broad Scope: The PCE price index is a comprehensive measure that reflects changes in the prices of goods and services consumed by all U.S. households and nonprofit institutions serving households (NPISHs). This is a broader scope than the Consumer Price Index (CPI), which focuses on urban households' out-of-pocket spending. The PCE includes expenditures made on behalf of consumers by third parties, such as employer-sponsored health insurance and government programs like Medicare and Medicaid. |
| • | Reflects Consumer Substitution: The PCE price index uses a "chain-type" index formula that accounts for consumer behavior. It adjusts for "consumer substitution," which is the tendency for people to switch from more expensive goods and services to cheaper alternatives when prices rise. For example, if the price of beef increases, consumers might buy more chicken. The PCE's formula reflects this change in spending patterns, which often results in a lower inflation reading over time compared to the CPI, which uses a more fixed "basket" of goods. |
| • | Data Source: The PCE is a component of the national income and product accounts (NIPA) produced by the Bureau of Economic Analysis (BEA). Its data is primarily based on business surveys and administrative records, rather than the household surveys used for the CPI. |
| • | Monthly Updates and Revisions: The PCE's weights are updated monthly to reflect changing consumer spending patterns. Additionally, PCE data can be revised retroactively to incorporate new data, which provides a more comprehensive and accurate picture of inflation over time. The CPI, by contrast, is generally not subject to significant revisions after its initial release. |
| • | Core PCE: The Federal Reserve often focuses on the "core" PCE price index. This measure excludes the volatile prices of food and energy, providing a clearer view of underlying, long-term inflation trends. |
The PCE price index is a dynamic and comprehensive measure of inflation that the Federal Reserve uses to guide its economic policy. Its broader scope and ability to account for consumer substitution are the main reasons it's favored over the more widely publicized CPI.