What Are Personal Consumption Expenditures (PCE)?
Personal consumption expenditures (PCEs) are imputed household expenditures defined for a period of time. Personal income, personal consumption expenditures, and the PCE Price Index reading 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.
- The Personal Income and Outlays report by the Bureau of Economic Analysis details personal income, personal consumption expenditures, and the PCE Price Index.
- Personal consumption expenditures are a measure of consumer spending for a period of time.
- The PCE Price Index and the Consumer Price Index are the two main inflation measures used by economists to track price movements in consumer goods and services.
The PCE Price Index is 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 also tracked by economists can include the Producer Price Index and the GDP Price Index.
Personal Consumption Expenditures
Understanding Personal Consumption Expenditures (PCE)
Collectively personal consumption expenditures are one of three main parts of the Personal Income and Outlays report. Personal income shows how much money consumers are bringing in. Personal consumption expenditures are a measure of the outlays or how much consumers are spending. The PCE Price Index uses the personal consumption expenditures component of the Personal Income and Outlays report to derive the PCE Price Index, which is the third major component of Personal Income and Outlays showing how prices are periodically inflating or deflating.
Personal consumption expenditures are shown by the BEA in current dollars and chained dollars since 2012. Personal consumption expenditures form the basis for the reporting of the PCE Price Index, which is detailed both comprehensively using all categories of PCE and excluding food and energy, which is known as the Core PCE Price Index.
Like most economic breakdowns, personal consumption expenditures are split between goods and services. Goods can be broken out further into durable and nondurable goods. Each month the BEA reports the total value of personal consumption expenditures collectively and broken out by goods, durable goods, nondurable goods, and services. Durable goods are items that last a household for more than three years and typically carry a larger price tag. Examples of durable goods include cars, televisions, refrigerators, furniture, and other similar items. Non-durable goods are considered "transitory," meaning that their life expectancy is typically less than three years. These items are also typically less costly and include products like makeup, gasoline, and clothing.
The BEA uses the current dollar value of personal consumption expenditures to calculate the PCE Price Index, which shows the amount of price inflation or deflation occurring from one period to the next (PCE inflation). 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. Ultimately, the PCE Price Index and Core PCE Price Index excluding food and energy show how much the prices of personal consumption expenditures have changed from one period to another, but breakdowns of the PCE Price Index also show PCE inflation/deflation by category as well.
When gauging inflation and the overall economic stability of the United States, the Federal Reserve prefers to use the PCE Price Index. However, the CPI is the most well-known economic indicator and usually gets a lot more attention from the media than the PCE Price Index. Other inflation measures include the Producer Price Index and the GDP Price Index.
The PCE Price Index is preferred by the Federal Reserve because it is composed of a broad range of expenditures. The CPI provides more granular transparency in its monthly reporting. As such, economists can more clearly see categories like cereal, fruit, apparel, and vehicles. Another difference between the PCE Price Index and CPI is that 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. Moreover, the PCE Price Index uses a formula that allows for changes in consumer behavior and changes occurring in the short term, which are adjustments not made in the CPI formula. These factors result in a more comprehensive metric for measuring 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.