Friday, April 19, 2024

PCE Price Index

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) develops the PCE price index.

Changes in the PCE price index are known for capturing price increases (or decreases) for a variety of consumer goods and services and reflecting changes in consumer behavior.

For example, if the price of butter and eggs increases, consumers may buy less butter and eggs.

The

Core Personal Consumption Expenditures (PCE) price index tracks changes in prices for consumers buying goods and services for their own use, but does not include food and energy .

What is PCE?

The PCE Price Index measures inflation in the United States and tracks changes in prices for goods and services purchased by consumers.

The

PCE Price Index is similar to the Bureau of Labor Statistics’ Consumer Price Index (CPI).

The two indexes are produced in different ways, used for different purposes, and therefore have different inflation rates.

Between the two, the PCE price index is the Fed’s preferred inflation measure.

What is the difference between PCE and CPI?

In the United States, there are two main measures of inflation:

  1. Personal Consumption Expenditures Index (PCE) published by the U.S. Bureau of Economic Analysis (BEA)
  2. Consumer Price Index (CPI) published by the U.S. Bureau of Labor Statistics (BLS)

Why do you need two?

While both indexes use a basket of goods to measure inflation, there are some differences between them:

Comprehensiveness

The

CPI only looks at out-of-pocket purchases of goods and services.

Does not include other expenses not paid directly, such as medical expenses paid by employer-provided insurance, Medicaid or Medicare.

All of this is included in PCE.

Formula

PCE is less volatile than CPI because it is calculated in a way that smoothes out these price swings.

Widely fluctuating prices (such as air tickets and fuel) are more likely to change the CPI formula.

Data source

The

PCE gets its information from GDP reports and suppliers, while the CPI gets its information from surveys of households.

PCE also tracks spending by all U.S. households and nonprofit organizations on goods and services. The CPI only focuses on households in cities .

Why is PCE the Fed’s preferred inflation measure?

PCE covers a wider range of goods and services.

It also responds to what is included or excluded from a basket of goods and services.

For example, if the price of milk rises and people buy less milk, PCE uses a new basket of goods to explain the less milk that people buy.

In contrast, CPI is slower to respond to changes in consumer preferences.

PCE data is more revised than CPI data and can only be adjusted for seasonal factors and the previous five years.

In summary, PCE includes a wider range of goods and services from a wider range of buyers than CPI. It attempts to track what is actually purchased and represents how consumer buying patterns change when relative prices change.

This results in smoother price changes in PCE.

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