From a high level perspective, the two measures are quite similar. You can see a recent comparison of the series here and the differences have historically been fairly small. Nonetheless, PCE inflation tends to come in a little lower than CPI inflation. PPI is useful measure of what’s going on in the U.S. economy and gives useful insights. Yet, it’s a little removed from the prices that consumers are actually paying today.
The PCE data for December 2023 showed an increase in personal consumption expenditures to just over $19 trillion, which is an increase of 0.7%. Personal consumption expenditures and the PCE Price Index are two different measurements. PCE measures consumer spending on goods and services, while the PCEPI measures the prices of those goods and services.
- As of Friday morning, futures traders were assigning about a 53% chance the Fed will enact its first rate cut this cycle in March, according to CME Group data.
- CPI and the PCE index both measure U.S. inflation in similar but ultimately different ways.
- It’s also responsive to what to include or exclude in the basket of goods and services.
- Headline inflation was flat on the month and at a 3% rate for the 12-month period, the release also showed.
- This represents an increase of about 0.3% from the previous month.
Inflation has been a nettlesome problem since the early days of the Covid pandemic, when price increases surged to their highest levels since the early 1980s. The Fed initially expected the acceleration to be temporary, then responded with a series of interest rate hikes that took its benchmark rate to its highest in more than 22 years. Food prices increased 0.1% on the month while energy goods and services rose 0.3%. Prices for longer-lasting durable goods such as appliances, computers and vehicles decreased 0.4%. As inflation drifted closer to the Fed’s target, consumer spending increased 0.7%, stronger than the 0.5% estimate.
When it comes to inflation measures, the Federal Reserve prefers the PCE
These three series overlay the percentiles of the 12-month change in inflation rates of the personal consumption expenditure categories. The expenditure categories series represents the number of personal consumption expenditure categories (of goods and services) with price increases as a fraction of total expenditure categories. The expenditure series represents the amount of expenditures by consumers on goods and services that are experiencing price increases as a fraction of total expenditures. The personal consumption expenditures (PCE) price index covers a broad range of goods and services and provides a general overview of the prices of things that are purchased directly by, or on behalf of, households. The CPI and PCE each come in two flavors, a so-called “headline” measure and a core measure, which strips out the more volatile food and energy components.
This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. We believe everyone should be able to make financial decisions with confidence. The PCE price index collects data on some different types of goods and services than the CPI does.
Core PCE inflation plays an important role in the U.S. financial system because the Federal Reserve references it to gauge U.S. inflation when setting monetary policy. The PCE gets its information from the GDP report and from suppliers, while the CPI gets its information from surveys of households. For example, if the price of butter and eggs goes up, consumers may buy less butter and eggs. Other economic signals lately have shown the economy to be in fairly good shape, though several Fed officials recently have said the data doesn’t square with comments they are hearing on the ground. The Cleveland Fed also posts a median PCE price index, and the Dallas Fed posts a trimmed-mean version.
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It also shows how people change their buying habits when prices change. This provides a window into demand for products and services which can help governments and businesses make decisions. Some observers feel that this reflects the inability to value personal consumption expenditures accurately.
However, both numbers fell on the month; income rose 0.4% in September while spending was up 0.7%. Slower spending growth, though, aligns with the Fed’s goal of cooling the economy so inflation can recede. As prices have risen consumers have eased back the pace of spending and put more money away.
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Of all the measures of consumer price inflation, the PCEPI includes the broadest set of goods and services. The personal consumption expenditures number shows how Americans collectively spend their money. Tracked from month to month, it is an indicator of the economy’s health overall. It also is a key component of the PCE Price Index, which tracks inflation or deflation in consumer prices over time. This means that, like the chained CPI, the PCE is better at accounting for substitutions between similar items when one of them becomes more expensive.
Broadly, the report reveals a slightly bigger monthly pickup in inflation than the consumer price index released earlier this month. Both reports show a decline in the price of goods, such as used cars, as pandemic-related supply chain troubles have resolved. New York Fed President John Williams said Thursday that he expects inflation to continue to drift lower, finally hitting the Fed’s 2% target in 2025.
So in calculating the median PCE inflation rate, the items excluded from the PCE price index change from month to month. The personal consumption expenditures price index, excluding food and energy prices, rose 0.2% for the month and 3.5% on a year-over-year basis, the Commerce Department reported. Both numbers aligned with the Dow Jones consensus and were down from respective readings of 0.3% and 3.7% in September. https://g-markets.net/ The chained CPI, however, takes into account the substitutions between similar items. It does this by updating its basket according to what people buy from one period to the next. Basically, the BLS calculates one measure of inflation using the basket from the first period, and another measure from the basket in the second period (which can have fewer apples and more peaches), and reports their average.
In other economic news Thursday, initial weekly jobless claims rose to 218,000, an increase of 7,000 from the previous period though slightly below the 220,000 estimate. However, continuing claims, which run a week behind, surged to 1.93 million, an increase of 86,000 and the highest level since Nov. 27, 2021, the Labor Department said. Outlays rose $52 billion for the month on services, while they fell $33.1 billion for goods, according to the Commerce Department’s Bureau of Economic Analysis. That came as goods prices decreased 0.1% while services rose 0.3%. According to her, the PCE is a broader and timelier measure of consumer behavior than the CPI, and that’s why the Fed prefers it.
So inflation is telling you, not that you weigh 170lbs, but that you have put on 5lbs over the past year. Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page.
What Is the Difference Between the PCE Price Index and the Consumer Price Index?
Although they both measure inflation, there are subtle differences between the PCE price index and the CPI. The most noticeable difference is that the PCE price index is not as well known as the Consumer Price Index. PCE data may reflect measurement errors that occur during collection and in source data provided to the BEA. It may also reflect classification shooting star forex errors (after collection) in the personal sector and other sectors comprising the national accounts (PCE is part of the National Income and Product Accounts constructed by the BEA). Personal consumption expenditures data provide a view of how the economy is faring. This information is important for economic policy purposes and business decision-making.
The Federal Reserve Bank of Dallas produces an alternative measure, the Trimmed Mean PCE inflation rate, which asymmetrically removes or trims the upper and lower tails of the distribution of price changes. The Commerce Department’s personal consumption expenditures price index for December, an important gauge for the Federal Reserve, increased 0.2% on the month and was up 2.9% on a yearly basis, excluding food and energy. Economists surveyed by Dow Jones had been looking for respective increases of 0.2% and 3%. These measures get rid of “noise” by leaving out whichever prices behave erratically each month, rather than singling out food and energy prices every time. The personal consumption expenditure price index (PCEPI) is one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy.