It also is a key component of the PCE Price Index, which tracks inflation or deflation in consumer prices over time. In addition to reporting the three measurements above, the Personal Income and Outlays report includes the PCE Price Index (PCEPI) figures. The PCEPI measures the prices consumers pay for goods and services and changes in those prices. Economists and analysts use PCE to make projections about future spending and economic growth. 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.

It consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services. The inflation gauge that was issued Thursday, called the personal consumption expenditures price index, is separate from the better-known consumer price index. Earlier this month, the government trade silver reported that the CPI rose 3.7% from a year earlier, down from a peak of 9.1% in June 2022, though its core measure also slowed. The core personal consumption expenditures price index, which is the Fed’s preferred inflation measure, jumped 0.1% over the month of August and 3.9% year-per-year, the Bureau of Economic Analysis reported.

Many economists now expect core inflation, as measured by the Fed’s preferred gauge, to drop by the end of the year to below the central bank’s estimate of 3.7%. That might show sufficient progress for the Fed to avoid any further rate increases this year. BEA measures consumer spending for the nation and is broken down by state and the District of Columbia. While it issues the aforementioned monthly report, additional details are provided annually. 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.

Ways Investors Can Make the Most of Inflation

Policymakers are watching the super core price measure as they try to gauge progress in their fight against inflation. The personal consumption expenditures price index, or PCE, measures changes in consumer spending on typical goods and services. It’s used to calculate inflation (or deflation) in the U.S. economy. The personal consumption expenditures price index, commonly known as the PCE price index, is one of the main measures of inflation and consumer spending in the U.S. The Bureau of Economic Analysis (BEA) publishes the PCE price index each month to track spending and inflation. The above table illustrates two commonly discussed important differences between the PCE deflator and CPI-U.

The change in the PCE price index is known for capturing rising (or falling) prices across a wide range of consumer goods and services and reflecting changes in consumer behavior. The battle against inflation is, however, far from being won as the report from the Commerce Department on Friday showed overall prices were still elevated, partly due to higher gasoline prices. Then PPI is measuring prices for businesses, which is quite a different topic, but certainly related. This can provide useful insights on price trends in the economy. Nowcasts can provide an early signal on inflation trends almost in real time.

• The combination of higher gas prices and sluggish income growth could weaken consumer spending in the months ahead.
• The effect that inflation has on your money—whether your “purchasing power” is decreasing or stable—will likely impact your portfolio, whether you’re investing in stocks, bonds, or alternative assets.
• In the 12 months through August, the PCE price index advanced 3.5% after gaining 3.4% in July.
• Yet the inflation story is about more than just energy, Faucher says.
• We believe everyone should be able to make financial decisions with confidence.

The PCEPI is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI. PCEPI also uses a formula that allows for changes in consumer behavior and changes that occur in the short term. Kuperberg said both indexes have value, but the fact that we’re even talking about two different measures of inflation is telling.

The Personal Consumption Expenditures (PCE) Price Index

Core prices edged up 0.1% from July to August, down from July’s 0.2%. Compared with a year ago, core prices were up 3.9%, below July’s reading of 4.2%. Personal consumption expenditures, or PCE, allows economists, consumers, and businesses to see how well the economy is faring from month to month.

What is the Personal Consumption Expenditures (PCE) price index?

Personal consumption expenditures and the PCE Price Index are two different measurements. PCE measures consumer spending on goods and services, while the PCEPI measures the prices of those goods and services. The Bureau of Economic Analysis calculates the figures for both.

Core Inflation vs. Headline Inflation

The latest data will likely bolster hopes among Fed officials that they will be able to bring inflation back to their target without driving up unemployment or causing a deep recession as many economists have feared. Consumer spending is an important factor that drives the U.S. economy and is a key part of GDP. Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.

If so, it would mark a slowdown from last summer’s healthy pace of spending, which is believed to have fueled solid economic growth in the July-September quarter. The personal consumption expenditures number shows how Americans collectively spend their money. Tracked from month to month, it is an indicator of the economy’s health overall.

This means inflation is cooling for the first time in the current spree, according to the BEA. 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.

If the core rate is above 2% for an extended period, then the Fed will take action to prevent inflation. The core PCE price index removes that volatility what is a momentum stock and gives an accurate picture of real inflation. US stocks edged higher on Friday as markets digested cooler-than-expected inflation data.

It can help inform your outlook as to whether or not the Federal Reserve may raise or lower interest rates. “Shrinking real disposable income is a harbinger that consumer spending will likely slow in the coming quarter,” Jeffrey Roach, chief economist at LPL Financial, warned Friday. PCE data may reflect measurement errors that occur during collection and in source data provided to the BEA. It may also reflect classification errors (after collection) in the personal sector and other sectors comprising the national accounts (PCE is part of the National Income and Product Accounts constructed by the BEA). Personal consumption expenditures data provide a view of how the economy is faring. This information is important for economic policy purposes and business decision-making.

How The Fed Measures Inflation, And What That Means For You

PCE updates weightings more frequently, includes urban and rural prices and covers items bought on behalf of consumers as well as goods and services consumers buy directly. Perhaps the biggest challenge when determining inflation is how you weight different prices to arrive at average inflation. CPI uses consumer expenditure surveys to determine what households are purchasing. Then we have the two most common measures of the prices that consumers are paying. From a financial market standpoint, CPI inflation is released earlier in the month for the prior month, so often gets a little more attention. Bureau of Labor Statistics, the Producer Price Index measures the average change in prices that domestic producers charge and manufacturers pay to make consumer goods.

PCE Inflation: What The Fed Envisions Next

PCE data would, theoretically, pick up on this during the month it occurred as business sales for bananas would fall. However, the CPI index would only pick up a change with its next weighting update which could be 1 or 2 years away. This top natural gas stocks is one reason CPI inflation can come in slightly higher than CPE inflation on average. But Friday’s report also contained good news for the Fed when it comes to consumption. Consumers continued to spend, but not quite as enthusiastically.