That’s why economists often turn to core measures of inflation instead, which rise much more stably. The PCE inflation rate is calculated by adding up the dollar amounts of all goods and services in a basket of goods and services, comparing the total to the prior month’s figures. Some prices must be adjusted based on estimates because the data needed for calculation is only compiled quarterly, whereas PCE inflation is released monthly.

Both the PCE Price Index and the Core PCE Price Index (which, again, excludes prices for food and energy) show how much prices change from one period to another. Breakdowns of the PCEPI show price inflation/deflation by category as well. Economists and analysts use PCE to make projections about future spending and economic growth.

  1. These factors result in a more comprehensive measure of inflation.
  2. This means that if you want to know the monthly price change for peanut butter, it’s there, buried in the pages of the CPI report.
  3. This again stems from the definition of the index and the surveys used.
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Personal income growth edged lower to 0.3%, in line with the forecast. An important inflation gauge released Friday showed that the rate of price increases cooled as 2023 came to a close. Headline inflation there fell to 2.4% on a 12-month basis, though core, which excludes food, energy and tobacco, was still at 3.6%, though down from 4.2% in September. Like the Fed, the European Central Bank targets 2% as a healthy inflation level.

Those were down respectively from the 0.4% and 4.3% increases reported for April. The headline year-over-year number was the lowest since April 2021 while the core was the lowest since October 2021. Also, the PCEPI uses a chained index which compares one quarter’s price to the previous quarter’s instead of choosing a fixed falling wedge and rising wedge base. This price index method assumes that the consumer has made allowances for changes in relative prices. That is to say, they have substituted from goods whose prices are rising to goods whose prices are stable or falling. The CPI breaks out price changes for different products and services in quite a lot of detail.

Personal consumption expenditures price index

According to the Bureau of Economic Analysis (BEA), a U.S. government agency, PCE accounts for about two-thirds of domestic spending and is a significant driver of gross domestic product (GDP). Prices for goods and services change constantly, rising and falling as companies and consumers react to trends in the economy. When you measure these price changes across an entire economy, that’s the rate of inflation.

The Fed’s Preferred Measure of Inflation

In contrast, Producer Price Index (PPI) measure costs for producers, such as businesses. The PPI was once called the Wholesale Price Index (WPI) which may be a simpler description of what it’s measuring – whole prices rather than consumer prices. The CPI is calculated by the Bureau of Labor Statistics, using its household survey data. And the CPI measures the spending habits of urban consumers only, while the PCE reflects the spending of rural and urban consumers. The consumer price index, or CPI, shares some similarities with the PCE.

The Fed compares the core PCE inflation rate to the Fed’s 2% target inflation rate. If it is below 2%, the Fed will lower interest rates and use its other tools to spur consumer demand. If the core rate is above 2% for an extended period, then the Fed will take action to prevent inflation. But prices of services such as health care, financial advice, transportation and insurance advanced more dramatically in Thursday’s report. That’s partly because those services are weighted more heavily in the PCE than the CPI index and higher wholesale costs play a bigger role, Barclays wrote in a research note.

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The personal savings rate for May rose to 4.6%, up from 4.3% in April. The index’s calculation is based on a fixed “basket” of over 100,000 goods, services and rentals, which are given different weights based on a household survey and tracked over time. While the basket is updated yearly, the way consumers behave can change a lot more frequently. Another aspect of the baskets that leads to differences is referred to as coverage or scope. The CPI only covers out-of-pocket expenditures on goods and services purchased. It excludes other expenditures that are not paid for directly, for example, medical care paid for by employer-provided insurance, Medicare, and Medicaid.

That index — which ticked up 6.6% in March from a year earlier, 5.2% excluding food and energy — is put out by the Bureau of Economic Analysis. “That’s the primary inflation measure that the Fed is using to make monetary policy decisions,” said Julie Smith, an economics professor at Lafayette College. Specifically, the BEA uses the Census Bureau’s annual retail trade surveys, economic censuses, quarterly services reports and monthly retail trade surveys. It also uses reports from private trade organizations and regulatory agencies. Through these reports, the BEA can estimate what goods and services were sold in a given time period. The Fed uses the core inflation rate because food, oil, and gas prices move so rapidly, especially in the spring and summer.

Understanding Personal Consumption Expenditures (PCE)

Inflation is typically described on a year-on-year basis, so saying that inflation is at 8% for September 2022, means that prices are 8% higher, on average, in September 2022 than in September 2021. The PCE is released monthly in the BEA’s Personal Income and Outlays report. The next Personal Income and Outlays report is expected to be released on Feb. 29.

It gives companies insight into their business needs concerning products and services and can affect hiring and investing. The BEA uses consumer spending to calculate its inflation gauge, the PCE Price Index, which is why measuring and tracking PCE is important. The most recent PCE price index data was released on January 26, 2024, covering the month of December 2023. The headline December PCE inflation figure was +2.6% year over year, which is the same as the annual rate of +2.6% in November. The PCE price index looks at U.S. inflation by measuring changes in the cost of living for households.

Which Is Better PCE or CPI?

The CPI rose 1.3% from May to June 2022, adjusted for the usual seasonal fluctuations, but didn’t change at all between June and July 2022. The CPI can be volatile from one month to the next, but the trend in the monthly change over several months can be an important indication of inflation. Another commonly used measure posted by the  BLS and often reported in the press compares the CPI in one month to the same month a year earlier – in other words how much prices have risen over the past 12 months. In July 2022, for instance, the CPI stood 8.5% above the year earlier reading. This approach is less influenced by a month with a particularly small or large change but both ways of reporting changes in the CPI are accurate. When including the volatile food and energy components, inflation was considerably softer — up just 0.1% on the month and 3.8% from a year ago.

An estimated total for PCE is compiled by the BEA to measure and track changes in spending on consumer goods over time. This figure can provide an idea of economic strength and how price changes can affect spending. Fed Chair Jerome Powell has said officials are most concerned about stubborn inflation for such services.