What does PCE stand for? What does the economic index measure?
Personal Consumption Expenditure, or PCE, is a measure of price changes in the economy. We took a look at how this index differs from the Consumer Price Index
There are two main indices used to track price changes in the US economy: the Bureau of Labor Statistics’ Consumer Price Index (CPI) and the Bureau of Economic Analysis’s Personal Consumption Expenditures Price Index (PCE).
Different in their methodologies, both of these indices provide important information to policymakers, economists, and private sector actors. In February, for example, the PCE tracked an increase in inflation of five percent. Meanwhile, over at the BLS, the CPI recorded an average price increase of six percent across goods and services.
What explains this difference?
When comparing the methodologies of these two indices, the gap lies in the data sources used. Although both are intended to gauge the prices paid by consumers for goods and services, the PCE obtains its data from businesses, while the CPI relies on consumer data.
According to the BLS, the PCE is able to capture a broader range of prices compared to the CPI. The agency cited the example of fluctuations in the cost of medical care. Unlike the CPI, which only considers changes in prices paid by individual consumers, the PCE takes into account any extra “employer contributions” that may affect the price for their employees.
Depending on the agency or institution, their mandates inform whether the PCE or the CPI is more useful. The Federal Reserve prefers the PCE, while the Social Security Adminstration uses the CPI to calculate the annual Cost-of-living adjustment.
The Federal Reserve’s preference for the PCE was explained by Governor Lisa D. Cook last week when she noted that the index “covers a broader set of goods and services than the CPI, and its weighting of individual prices can change each month to reflect consumer spending behavior.” Not only does the PCE provide information on changes in prices, but also changes in the goods and services demanded by consumers. Currently, the Federal Reserve is increasing interest rates to bring down aggregate demand, and the PCE is one tool the central bank uses to examine the relationship between their actions and the impact they have on consumers and firms.
A change in the way inflation is impacting the economy
Moreover, the Fed utilizes an alternative version of the PCE, which does not include food and energy commodities as their prices tend to have more frequent fluctuations. By analyzing the price fluctuations of all goods and services excluding these two, economists can gain deeper insights into the manifestation of inflationary pressure in the market.
The BEA is set to release the PCE report for March later today, which the Federal Reserve will use to assess how rate hikes have affected price changes. The March CPI report has already shown a shift in how inflation is affecting consumer markets. In comparison to the prices recorded a year ago, prices for services and housing have increased more than those in the energy and food markets over the past month.
While the prices for food and energy have fallen, and the pace of inflation has slowed, prices are still moving up and are not on track to see growth under two percent by the end of the year.