Economy

Personal Consumption Expenditure (PCE)

What is Personal Consumption Expenditure (PCE)?

The term Personal Consumption Expenditure (PCE) refers to a measure of estimated household spending defined over a period of time. Personal Income, PCE and PCE Price Index readings are published monthly in the Bureau of Economic Analysis (BEA) Personal Income and Expenditure Report. Personal consumption expenditures support reporting of the PCE Price Index, which measures changes in prices of consumer goods and services exchanged in the U.S. economy.

In 2012, the PCE price index became the main inflation index used by the Federal Reserve in formulating monetary policy. It is comparable to the Consumer Price Index (CPI), which also focuses on consumer prices. Other inflation indicators tracked by economists include the producer price index (PPI) and the gross domestic product (GDP) price index.

key takeaways

  • Personal consumption expenditures measure consumer spending over a period of time.
  • PCE is a measure reported by the Bureau of Economic Analysis in the Personal Income and Expenses report along with the Personal Income and PCE Price Index.
  • PCE includes spending on durable and non-durable goods and services.
  • The PCE price index is the Fed’s preferred method of measuring inflation.
  • PCEPI uses prices and GDP from all households, companies and governments.

personal consumption expenditure

Understanding Personal Consumption Expenditure (PCE)

Personal consumption expenditures are one of the three main sections of the Personal Income and Expenses report. Personal income shows how much money consumers make. Personal Consumption Expenditure is a measure of how much spending or how much consumers spend.

The PCE Price Index uses the Personal Consumption Expenditure component of the Personal Income and Expenditure report to derive the PCE Price Index, the third major component of Personal Income and Expenditure that shows how prices periodically expand or contract.

The BEA shows personal consumption expenditures in current dollars and sequential dollars since 2012. Personal consumption expenditures form the basis for reporting the PCE price index, which is detailed using a combination of all categories of PCE, excluding food and energy, known as the core PCE price index.

How to Measure Personal Consumption Expenditure (PCE)

Like most economic collapses, the PCE is divided into consumer goods and services. The BEA reports the total value of personal consumption expenditures on a monthly basis. This is broken down by Goods, Durable Goods, Non-Durable Goods, and Services.

Durable goods are pricier items that last longer than three years. Examples of durable goods include automobiles, electronics, appliances, furniture, and other similar items. The life expectancy of non-durable goods is less than three years. These items are usually lower cost and include cosmetics, gasoline and clothing.

BEA uses the current dollar value of the PCE to calculate the PCE Price Index. The index shows price inflation or deflation that occurs from one period to the next. Like most price indices, the PCE price index must contain a deflator (PCE deflator) and actual values ​​to determine the amount of cyclical price changes.

Both the PCE price index and the core PCE price index (excluding food and energy) show how much personal consumption expenditure prices have changed from one period to another, but the breakdown of the PCE price index also shows PCE inflation/ deflation.

PCE Price Index (PCEPI) and Consumer Price Index (CPI)

The CPI is the most well-known economic indicator and usually gets more media attention. But the Fed prefers to use the PCE price index when measuring inflation and overall U.S. economic stability.

There are other indicators used to measure inflation, including the producer price index and the GDP price index.

So why does the Fed prefer the PCE price index? This is because the metric consists of a broad range of expenditures. The PCE price index is also weighted by data obtained through business surveys, which tend to be more reliable than consumer surveys used by the CPI. CPI, on the other hand, provides more granular transparency in its monthly reports. As a result, economists can see categories such as grain, fruit, clothing and vehicles more clearly.

Another difference between the PCE price index and the CPI is that the formula used by the PCE price index 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 lead to a more comprehensive measure of inflation. The Fed depends on the nuances revealed by the PCE price index, as even minimal inflation can be seen as an indicator of economic growth and health.

Pros and Cons of Personal Consumption Expenditure (PCE)

Personal consumption expenditures provide a glimpse into economic development. When people spend without hesitation, it usually means the economy is doing well. But when they cut spending, it signaled a problem with the overall economic situation.

advantage

The PCE price index is not as widely known as the CPI, which is commonly quoted in the financial media. While the CPI uses a household survey created by the Bureau of Labor Statistics (BLS) to determine the direction of prices, the PCE PI is much broader. This is because it takes data directly from businesses and corporations while taking GDP into account.

PCEPI considers a wider range of goods and services, specifically those purchased by all households across the country, while CPI only considers households in urban settings.

The Personal Consumption Expenditure price index is also much less volatile than the CPI, which is affected by major price changes for certain products such as gasoline. PCEPI eliminates any major fluctuations.

shortcoming

While it’s the preferred metric used by the Federal Reserve, PCEPI has some glaring problems. One of the main points is that it takes into account GDP – a figure that is only measured and reported quarterly. But BEA reports PCE monthly. To compensate, the agency must fill in the gaps. It does this by using retail sales on a monthly basis.

Another disadvantage of using PCEPI is that it is too broad because it uses information from households and other entities such as nonprofits, governments, and corporations. CPI, on the other hand, provides data that is reported directly from consumers.

advantage

  • The PCE Price Index takes price data directly from businesses and companies, taking into account GDP
  • PCEPI consulted a wider population, including all households and different organisations
  • PCEPI is not as volatile as CPI as it is not affected by major price fluctuations
shortcoming

  • PCEPI reports monthly, but uses GDP in its formula, which reports quarterly
  • While CPI only obtains data directly from consumers, PCEPI also uses information from other entities

Personal Consumption Expenditure (PCE) Example

As mentioned above, personal consumption expenditure is a measure of how consumers spend their money on goods and services. It’s easy to find examples of consumer spending.

A service is anything that a business provides to individuals that they cannot do themselves. For example, banks provide financial services to consumers, such as providing bank accounts. Loans and bill payments. A landscaping company gets paid to take care of the exterior of people’s homes, including their yards.

Commodities are divided into two categories: durable and non-durable. The durable goods category includes any item that has a long shelf life and is generally more expensive to purchase. This includes items such as vehicles, appliances and furniture. Non-durable goods, on the other hand, are things that don’t last long — usually less than three years — and are easy to replace because they don’t cost much. Groceries, health and wellness products, and apparel.

bottom line

Personal consumption expenditures allow economists, individuals and companies to understand the state of the economy. That’s because it’s a measure of how consumers spend their money. It includes more expensive durable goods, cheaper essentials under the non-durable category, and services such as banking. It also shows how people change their buying habits when prices change. This makes it a very important number because it provides a window into demand for products and services, as well as inflation.

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