What Is The PCE Price Index? How Does It Track Inflation?

Examples of services are legal advice, house cleaning, and plumbing. Consumer spending is an important factor that drives the U.S. economy and is a key part of GDP. Please consult a qualified professional for financial, legal, or health advice specific to your circumstances. For many years, the Federal Reserve primarily used CPI as its main inflation reference, like the general public. However, in 2000, the Federal Open Market Committee formally announced its preference shift to PCE price index.

Interactive Data

Some prices must be adjusted based on estimates because the data needed for calculation is only compiled quarterly, whereas PCE inflation is released monthly. The PCE price index looks at U.S. inflation by measuring changes in the cost of living for households. It tracks the prices of a basket of goods and services, each with different weightings, to reflect how much a typical household spends every month. While the CPI measures the costs of various goods, the PCE takes its data from the BEA’s Gross Domestic Product (GDP) report. Plus, the PCE takes into account how much households are spending and what they’re spending their money on. These factors, among others, are why the PCE is the Fed’s preferred inflation measure.

Fed Preference for the PCE Price Index

PCE data may reflect measurement errors that occur during collection and in source data provided to the BEA. When people spend without hesitation, it usually means that the economy is doing well. When they cut back on spending, it points to problems in the overall economic picture.

• PCE data integrates directly with GDP calculations, providing consistency across economic measurements and facilitating more accurate forecasting.
• Simultaneously, major fiscal policy components—automatic transfer payment adjustments through Social Security—are legally tied to CPI-W.
• Because PCE is built using the same data feeding GDP calculations, it’s fundamentally a macroeconomic tool.
• It also is a key component of the PCE Price Index, which tracks inflation or deflation in consumer prices over time.
• Instead of asking people what they bought, the Bureau of Economic Analysis measures what businesses sold.

The Federal Reserve seeks to achieve inflation at the rate of 2 percent over the longer run as measured by the annual change in the price index for personal consumption expenditures (PCE). Inflation is the rate at which the price of goods and services increases over time. Keeping inflation low and stable is one of the Federal Reserve’s goals when conducting monetary policy. For investors, a higher PPI indicates that higher consumer prices may be coming in the months ahead. Although changes in the PPI won’t always predict changes in CPI inflation, it’s a handy tool for any investor trying to forecast the inflationary environment. The Fed’s PCE reliance directly affects interest rates consumers and businesses pay.

What is the Fed’s inflation target?

Our resources are updated regularly but please keep in mind that links, programs, policies, and contact information do change. The Federal Reserve Bank of St. Louis maintains comprehensive historical PCE data through its FRED (Federal Reserve Economic Data) database, offering downloadable series dating back to 1959. Michael Adams is a former Cryptocurrency and Investing Expert Editor at Forbes Advisor. He’s researched, written about and practiced investing for nearly two decades.

• While the Fed bases interest rate decisions on core measures that ignore gasoline and grocery prices, these categories are most visible and financially impactful for average households.
• Watching the PCE along with the CPI can give you a more detailed perspective on consumer price inflation.
• No representation or warranty is given as to the accuracy or completeness of this information.
• The Federal Reserve’s PCE preference isn’t arbitrary but a deliberate, strategic decision rooted in effective, forward-looking monetary policy requirements.
• The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research.
• PCE data undergoes regular revisions as additional source information becomes available.

Gasoline represents a larger portion of a family’s monthly budget, so it’s weighted more heavily in Trading Stock Indexes for beginners calculating PCE. That means rising gas prices have a bigger impact on the overall index than cheaper tomatoes. The existence of this dual-index system creates structural divergence at U.S. economic policy’s heart. The nation’s monetary policy, conducted by the Federal Reserve, is guided by PCE price index. Simultaneously, major fiscal policy components—automatic transfer payment adjustments through Social Security—are legally tied to CPI-W.

Three Reasons for PCE Preference

This weighting disparity primarily explains why the indexes often diverge. During rapidly rising rent and home price periods, CPI almost certainly shows higher inflation than PCE due to much larger shelter weighting. CPI’s most significant official use is calculating annual cost-of-living adjustments for federal programs, notably Social Security benefits. It also serves as the benchmark for Treasury Inflation-Protected Securities, government bonds protecting investors from inflation.

That’s why economists often turn to core measures of inflation instead, which rise much more stably. The third indicator you might want to follow makes up a part of the monthly personal income and outlays report from the U.S. It’s called the Personal Consumption Expenditures (PCE) price index. This preference was cemented in January 2012, when the FOMC announced its first-ever explicit numerical inflation target under Chairman Ben Bernanke.

Beyond PCE figures, the BEA calculates critical metrics including Gross Domestic Product (GDP), international trade balances, and regional economic statistics. Its data undergoes rigorous quality controls and peer review processes to ensure accuracy and reliability. The Bureau of Economic Analysis operates as an independent statistical agency within the U.S. Established in 1972, the BEA collects, analyses, and publishes comprehensive economic data that informs both government policy and private sector decision-making. Disposable personal income increased by $102 billion (also 0.5% from the previous month) and PCE grew by $134.5 billion (a 0.7% increase from the previous month). This information is important for economic policy purposes and business decision-making.

Nominal PCE measures spending in current dollars, whilst real PCE adjusts for inflation to show the actual volume of goods and services purchased. Real PCE provides a more accurate picture of consumption trends by removing price effects. Understanding this indicator becomes increasingly critical for investors, businesses, and consumers navigating an evolving economic landscape.

What is the Producer Price Index (PPI)?

The BEA provides extensive supplementary tables breaking down PCE by detailed product categories, enabling sector-specific analysis. Typically maintains current policy settings, allowing the economy to grow at a sustainable pace. In addition to reporting the three measurements above, the Personal Income and Outlays report includes the PCE Price Index (PCEPI). Personal consumption expenditures (PCE) is the value of goods and services purchased by or for U.S. consumers.

Its comprehensive scope, dynamic methodology, and integration with national economic accounts make it better suited for the Fed’s forward-looking approach to monetary policy than the more familiar Consumer Price Index. The Bureau of Labor Statistics produces the Consumer Price Index monthly, measuring average price changes over time paid by urban consumers for a market basket of goods and services. Dating to 1919, CPI is deeply embedded in the nation’s economic fabric.

Personal Consumption Expenditures (PCE): What It Is and Why the Fed Tracks It

It also shows how people change their buying habits when prices change. Some observers feel that this reflects the inability to value personal consumption expenditures accurately. The BEA reports the total value of personal consumption expenditures collectively every month. Like most economic breakdowns, PCE is split between consumer goods and services. Durable goods and nondurable goods are components of the consumer goods figure.

They can remain price-competitive and take a hit to their operating margin (and to their earnings), or maintain revenues by raising prices, but risk losing sales or even customers. This means the two most powerful macroeconomic management levers effectively respond to different dashboards. Despite the Fed’s shift, CPI continues playing critical roles in fiscal policy and private contracts. A consistent historical pattern shows CPI inflation typically runs higher than PCE inflation. Since 2000, annual CPI inflation has averaged about 0.4 percentage points higher than PCE inflation.

Two common price indexes are the consumer price index (CPI) and the personal consumption expenditures (PCE) price index. While the two are similar, the PCE index is constructed in a way that accounts for how Americans are spending their money at a given time and more quickly adapts to changes in spending patterns. This happens for a few reasons, such as when market participants speculate on energy and food and commodity futures. Because this isn’t based on real consumer supply and demand, it doesn’t necessarily reflect inflation in the real economy.

PCE, by including employer and government program payments, measures this sector far more accurately than CPI, which is limited to out-of-pocket costs. While the Fed bases interest rate decisions on core measures that ignore gasoline and grocery prices, these categories are most visible and financially impactful for average households. But if core inflation remains stable, the Fed might view this as temporary supply issues and choose not to raise rates. As the Federal Reserve’s preferred inflation gauge, PCE data directly influences monetary policy decisions that ripple through financial markets, affecting everything from mortgage rates to corporate borrowing costs. To measure inflation across the entire economy, economists produce price indexes to see how overall prices for goods and services are changing.