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What are 'Personal Consumption Expenditures - PCE'?

Personal consumption expenditures (PCE), or the PCE Index, measures price changes in consumer goods and services. Expenditures included in the index are actual U.S. household expenditures. Data that pertains to services, durables and non-durables are measured by the index. Similar to 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 use the CPI because of its ability to determine economic stability using the fixed basket of goods.

The PCE index can reveal household buying and shopping habits. For example, sharp price increases may cause shoppers to buy less, which would be reflected in a change in the index.  PCE reveals the elasticity of demand; when demand for a good or service is elastic, people cut back even if the price goes up slightly, and when demand is inelastic, people continue to buy the same amount despite big price increases.

Inflation

When gauging inflation and the overall economic stability of the United States, the Federal Reserve prefers to use the PCE Index. The CPI is the most well-known economic indicator, and the PCE is largely forgotten. However, the Federal Reserve prefers the PCE index when reviewing economic conditions and fiscal policy, inflation, and employment.

The PCE is preferred because it is composed of a broad range of expenditures. While the CPI helps to 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 broad range of household expenses. The PCE is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI.

In addition, the PCE 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 reveals because even minimal inflation is considered an indicator of a growing and healthy economy.

Durables Versus Non-Durables

The PCE is broken down into two categories: goods and services. Goods are then further broken down into durables and non-durables. Durable goods are items that last a household 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 such as makeup, gasoline and clothing.

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