What Is PCE (Personal Consumption Expenditures)?

PCE, short for Personal Consumption Expenditures, is the US price index the Federal Reserve sets its 2% inflation goal on. It measures the prices that people living in the United States, or those buying on their behalf, pay for goods and services (BEA).

The Bureau of Economic Analysis (BEA) publishes it every month in its Personal Income and Outlays report, at 8:30 a.m. Eastern Time. Every date is on the BEA’s release schedule. The date and time of the next report are on When is the next PCE report? The forecast and the recent results against it are on US PCE Price Index.

The same report gives consumer spending itself. An earlier read on part of that spending is the monthly report in What Is Retail Sales?

The Fed’s target measure

The Federal Reserve names inflation of 2 percent, “as measured by the annual change in the price index for personal consumption expenditures”, as most consistent with its mandate (Statement on Longer-Run Goals).

The Fed says it uses PCE largely because it covers a wide range of household spending (Federal Reserve FAQ). The goal is set on the headline index, food and energy included.

Headline and core PCE

• Headline PCE covers everything in the index.
• Core PCE leaves out food and energy. Their prices swing up and down more sharply and more often than other prices, so without them the underlying trend is easier to see (BEA).

The goal stays on headline. Core is the guide to where inflation is trending, which is why traders read the two together. More in What Is Core Inflation?

How PCE differs from CPI

The CPI comes from a different agency, the Bureau of Labor Statistics, and is built differently. The BEA puts the gap between the two inflation rates down to three effects (BEA FAQ):

• Formula: PCE uses a Fisher-Ideal formula, the CPI a modified Laspeyres formula.
• Weights: the two give items a different share. The BEA’s example is the rent homeowners would pay for their own home.
• Scope: PCE also counts spending made on households’ behalf, which the CPI’s out-of-pocket view leaves out. Hospital and nursing home services are the BEA’s example.

The two usually move the same way, but the gap between them changes over time.

Why PCE moves the dollar

A central bank sets interest rates to keep inflation near its goal, and PCE is the measure the Fed’s goal is written on.

• A reading above the forecast makes higher US rates, or fewer cuts, more likely. That tends to support the dollar.
• A reading below the forecast does the reverse.

The surprise against the forecast matters more than the level. Traders look at core alongside headline before they decide what the report says.