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What are 'Personal Consumption Expenditures - PCE'

Personal consumption expenditures (PCE), or the PCE Index, measure price changes of consumer goods and services. Expenditures noted on the index include actual expenditures and expenditures that are attributed to households in the United States; data that pertains to services, durables and non-durables is measured through the index. Sharing similarities with the Consumer Price Index (CPI), the PCE is part of the personal income report issued by the Bureau of Economic Analysis of the Department of Commerce.

BREAKING DOWN 'Personal Consumption Expenditures - PCE'

The PCE is often considered predictable, and many analysts prefer to utilize the CPI because of its widely touted ability to aid in determining economic stability or lack thereof, due largely to the fixed basket of goods used.

Inflation

In the matter of gauging inflation, and the overall economic stability of the U.S., the Federal Reserve prefers not to lean on the go-to barometer of economic health. Because the CPI is the most well-known economic indicator, the PCE is largely forgotten. The Fed, however, prefers the PCE index when reviewing economic conditions and charting a course of action that impacts inflation and employment.

The main reason for this is the range of expenditures included in the PCE. While the CPI helps clearly depict shifts or changes in consumer expenditures, it only reveals changes in those expenditures that fall within the pre-established fixed basket. The PCE, on the other hand, includes a great variety of expenses in homes across the country.

The PCE is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys utilized by the CPI.

Also, the PCE makes use of a formula that allows for changes in consumer behavior, changes occurring in the short term, an adjustment for which the regulation CPI formula doesn’t make room. These factors, combined, result in a more comprehensive inflation metric; the Fed depends upon the nuances the PCE reveals, because even a small amount of inflation is regarded as an indication of a growing and healthy economy.

Durables vs Non-Durables

The PCE is broken down into two large categories: goods and services. The major component of these two – goods – is then further broken down into durables and non-durables. Durable goods are items that last a household more than three years and typically carry larger price tags. Examples include cars, televisions, refrigerators, furniture and other similar items. Non-durable goods are labeled ‘transitory,’ meaning their life expectancy is typically not more than three years. These items are also generally much less costly and include products such as makeup, gasoline and clothing.

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