Personal Consumption Expenditures (PCE): What It Is, Measurement

What Are Personal Consumption Expenditures (PCE)?

An estimated total of personal consumption expenditures (PCE) is compiled by the U.S. government monthly as one way to measure and track changes in the prices of consumer goods over time.

PCE as well as personal income statistics and the PCE Price Index are released monthly in the Bureau of Economic Analysis (BEA) Personal Income and Outlays report.

Personal consumption expenditures support the reporting of the PCE Price Index, which measures price changes in consumer goods and services exchanged in the U.S. economy.

Key Takeaways

  • Personal consumption expenditures are a measure of consumer spending.
  • PCE is one measure that is reported by the Bureau of Economic Analysis, along with personal income and the PCE Price Index in the Personal Income and Outlays report.
  • PCE includes how much is spent on durable and non-durable goods, as well as services.
  • The PCE Price Index is the method used by the Federal Reserve to measure inflation.
  • The PCEPI is based on prices from all households, corporations, and governments, along with gross domestic product (GDP).
1:24

Personal Consumption Expenditures

Understanding Personal Consumption Expenditures (PCE)

Personal consumption expenditures are one of the three parts of the Personal Income and Outlays report. Personal income is how much money consumers earn. Personal consumption expenditures are their outlays, or how much consumers spend.

The PCE Price Index uses the personal consumption expenditures component of the Personal Income and Outlays report to calculate the PCE Price Index. That is the third major component of Personal Income and Outlays, which shows how prices are inflating or deflating.

Personal consumption expenditures have been reported by the BEA since 2012 in both current dollars and chained dollars. Personal consumption expenditures form the basis for the reporting of the PCE Price Index.

The index is reported in two ways: comprehensively using all categories of PCE and excluding food and energy. The latter is known as the Core PCE Price Index.

In 2012, the PCE Price Index became the primary inflation index used by the U.S. Federal Reserve when making monetary policy decisions. It is comparable to the Consumer Price Index (CPI), which also focuses on consumer prices.

Other measures of inflation tracked by economists include the Producer Price Index (PPI) and the Gross Domestic Product (GDP) Price Index. 

How Personal Consumption Expenditures Are Measured

Like most economic breakdowns, PCE is split between consumer goods and services. The BEA reports the total value of personal consumption expenditures collectively every month. This is broken down by goods, durable goods, nondurable goods, and services.

Durable goods are pricier items that last longer than three years. Examples include cars, electronics, appliances, and furniture. Non-durable goods have a life expectancy of under three years. These include products like cosmetics, gasoline, and clothing.

Tracking the Numbers

The BEA uses the current dollar value of PCE to calculate the PCE Price Index. This index shows the price inflation or deflation that occurs from one period to the next.

Like most price indexes, the PCE Price Index must incorporate a deflator (the PCE deflator) and real values in order to determine the amount of periodic price change.

Both the PCE Price Index and the Core PCE Price Index (excluding food and energy) show how much the prices of personal consumption expenditures have changed from one period to another. Breakdowns of the PCE Price Index show PCE inflation/deflation by category as well.

PCE Price Index (PCEPI) vs. Consumer Price Index (CPI)

The CPI is the best-known economic indicator and gets the most attention from the media. But the Federal Reserve prefers to use the PCE Price Index when gauging inflation and the overall economic stability of the United States.

Other indicators used to measure inflation include the Producer Price Index and the GDP Price Index.

Why does the Fed prefer the PCE Price Index? This metric is composed of a broad range of expenditures. The PCE Price Index is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI.

The CPI, on the other hand, provides more granular transparency in its monthly reporting. Economists studying the data can clearly see categories like cereal, fruit, apparel, and vehicles.

Another difference between the PCE Price Index and CPI is that the PCE Price Index uses a formula that allows for changes in consumer behavior and changes that occur in the short term. These adjustments are not made in the CPI formula.

These factors result in a more comprehensive measure of inflation. The Federal Reserve depends on the nuances that the PCE Price Index reveals because even minimal inflation can be considered an indicator of a growing and healthy economy.

Advantages and Disadvantages of Personal Consumption Expenditures (PCE)

Personal consumption expenditures data provide a glimpse of how the economy is faring. When people are spending 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.

Advantages

The PCE Price Index isn't as well known to the general public as the CPI. While the CPI uses household surveys created by the Bureau of Labor Statistics (BLS) to determine the direction of prices, the PCE PI is much broader. That's because it takes data directly from businesses and corporations while taking GDP into account.

The PCEPI considers a broader spectrum of goods and services, notably those purchased by all households across the country. The CPI accounts only for households in urban settings.

The personal consumption expenditures price index is also much less volatile compared to the CPI, which is influenced by major price movements in certain products like gasoline. The PCEPI smooths out any major swings.

Disadvantages

While it is the preferred metric used by the Fed, there are some distinct problems with the PCEPI. One is that it takes into account GDP—a figure that is only measured and reported on a quarterly basis. But the PCE is reported every month by the BEA. The agency must fill in the gap by using retail sales every month.

Another disadvantage to the PCEPI is that it is far too broad. It uses information from both households and other entities such as nonprofits, governments, and corporations. The CPI, on the other hand, provides data that is directly reported specifically from consumers.

Pros
  • The PCE Price Index takes into account price data from businesses and corporations, along with GDP.

  • A wider range of people are observed for the PCEPI, including all households and organizations.

  • The PCEPI isn't as volatile as the CPI as it isn't influenced by major price swings.

Cons
  • The PCEPI is reported monthly but uses GDP in its formula, which is reported quarterly.

  • While the CPI only takes data directly from consumers, the PCEPI also uses information from other entities.

Example of Personal Consumption Expenditures (PCE)

A service is anything that a business provides to an individual that they can't do for themselves. For instance, banks are paid to provide financial services such as bank accounts. loans, and bill payments. A landscaping company is paid to take care of people's gardens.

Goods are divided into two categories: Durable and non-durable. The durable goods category includes anything that has a long shelf life and typically costs more to purchase. This includes vehicles, appliances, and furniture. Non-durable goods don't last that long—normally less than three years—and don't cost that much. Groceries, health and wellness products, and clothing are examples.

What Is the Importance of the Personal Consumption Expenditures (PCE) Number?

The Personal Consumption Expenditures (PCE) number shows how Americans collectively spend their money. Tracked from month to month, it is an indicator of the health of the economy overall.

It also is a key component of the PCE Price Index, which tracks inflation or deflation in consumer prices over time.

Personal Consumption Expenditures (PCE) vs. Consumer Price Index (CPI): Which Is Better?

The CPI is compiled monthly by the Bureau of Labor Statistics based on a survey of urban households. It measures the price of a "basket" of household goods and services that most people buy regularly. Its movements from month to month show whether the prices paid by consumers are going up or down, and by how much.

The PCE, produced monthly by the Bureau of Economic Analysis, also records changes in the prices of a basket of goods from month to month. It is broader in scope, as it factors in price changes in the entire output of the economy as well as in out-of-pocket costs to consumers.

What Does the PCE Data Show Us Now?

The PCE data for the one-year period ending April 2022 show a steady rise in personal consumption expenditures from about $15.6 billion to about $17.0 billion. Those numbers contributed to an overall PCE inflation rate of 6.3% for the period.

The Bottom Line

Measuring personal consumption expenditures allows economists, individuals, and corporations to see how well the economy is faring from month to month. That's because it's a measure of how consumers spend their money.

It also shows how people change their buying habits when prices change. This provides a window into demand for products and services.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Bureau of Economic Analysis. "Quick Guide: Personal Income & Outlays Releases."

  2. Bureau of Economic Analysis. "Consumer Spending."

  3. Bureau of Economic Analysis. "Personal Consumption Expenditures Price Index, Excluding Food and Energy."

  4. Board of Governors of the Federal Reserve System. "Federal Reserve issues FOMC statement of longer-run goals and policy strategy."

  5. Federal Reserve Bank of Cleveland. "PCE and CPI Inflation: What’s the Difference?"

  6. Bureau of Economic Analysis. "A Reconciliation between the Consumer Price Index and the Personal Consumption Expenditures Price Index," Page 3.

  7. Bureau of Economic Analysis. "A Reconciliation between the Consumer Price Index and the Personal Consumption Expenditures Price Index," Page 10.

  8. Bureau of Economic Analysis. "Concepts and Methods of the U.S. National Income and Product Accounts," Pages 5-1 and 5-2.

  9. Federal Reserve Bank of Cleveland. "The CPI–PCEPI Inflation Differential: Causes and Prospects."

  10. Bureau of Labor Statistics. "A comparison of PCE and CPI: Methodological Differences in U.S. Inflation Calculation and their Implications," Page 4.

  11. Bureau of Labor Statistics. "Consumer Prices Index Overview."

  12. Dallas Fed. "Trimmed Mean PCE Inflation Rate."

  13. St. Louis Fed Economic Data. "Personal Consumption Expenditures."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description