When Americans consider rising and falling prices, they often focus on the national inflation rate. However, there are many ways to assess the costs of goods and services, including the Personal Consumption Expenditures Price Index (PCE).
The PCE is a monthly assessment of the prices people in the United States pay for goods and services across a wide range of consumer expenses. Much like the Consumer Price Index (CPI), the PCE reflects changes and insights into consumer behavior.
What are the differences between the CPI and the PCE?
Both the CPI and PCE examine the state of consumer prices in the United States. They are released monthly and also offer a “core” version of the price index that excludes the most volatile categories: food and energy.
One of the main differences between the two is who reports them. While the Bureau of Economic Analysis is responsible for the PCE, the Bureau of Labor Statistics releases the CPI based on the Consumer Expenditure Survey conducted by the Census Bureau. The PCE is based on multiple business-focused Census surveys, such as the Service Annual Survey and the Quarterly Services Survey[1].
The PCE and CPI also use different mathematical formulas to analyze data.
Insight into consumption and spending behaviors
These methodological differences mean that the PCE measures the change in goods and services consumed by all households and the nonprofit institutions serving them. As a result, the PCE provides insights into items and expenditures that are outside the scope of the CPI.
A good example is medical care services. The PCE includes services that are paid for on behalf of consumers through employer-provided health insurance and programs like Medicare and Medicaid. In comparison, the CPI only includes household out-of-pocket expenses.
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What measurement does the Federal Reserve use?
As a result of these differences, the Federal Reserve closely monitors the “core” PCE index when making decisions regarding inflation mediation and interest rates. Prior to 2000, the Fed typically relied primarily on the CPI.
What do the latest PCE measurements say about the economy?
Much like the measurements provided by the CPI, the PCE illustrates the process of recovering from a period of high inflation rates.
The PCE index rose by 2.4% between January 2023 and January 2024, a slight decrease from the 2.6% growth from December 2022 to December 2023. Overall, the pace of inflation has been declining in recent months, but it remains higher than the Federal Reserve’s stated goal of 2%..
Beyond inflation indicators, the PCE also provides insights into how Americans spend their earnings.
In January, American personal consumption expenditures increased by $43.9 billion over December 2023, up 0.2%. The BEA reports that the largest contributors to this increase were housing, financial services, and healthcare.
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