Have you heard the word PCE dropped recently? That’s probably because new PCE readings have come out as of the beginning of April 2023. PCE, or Personal Consumption Expenditures, is a widely used measure of inflation in the United States. 

In our latest episode, we break down the latest PCE and use it to diagnose the current state of the economy and predict what moves the Fed will make regarding interest rates and lending. 

While we’ve touched on this topic before, it’s crucial to understand these metrics and how they affect our everyday life. They provide valuable insights into the current state of the economy and the purchasing power of consumers. 

Knowing about PCE and its trends can help individuals and businesses make informed decisions about investments, pricing, and financial planning. 

Additionally, PCE is a crucial factor in the decision-making process of the Federal Reserve as it uses the measure to set inflation targets and determine appropriate monetary policy actions. So let’s delve deeper into PCE and its significance in the world of economics.

What is PCE?

Let’s first lay the foundation. What is PCE in the first place? Simply put, it’s a measure of inflation based on household expenditures in the United States. It measures the change in the prices of household goods and services, including food, clothing, housing, transportation, and healthcare. 

PCE is a more comprehensive measure of inflation than other measures like the Consumer Price Index (CPI) because it considers changes in the composition of goods and services people buy.

How is PCE calculated?

PCE is calculated by the Bureau of Economic Analysis (BEA), a part of the U.S. Department of Commerce. The BEA collects data on the prices of goods and services from various sources, including surveys of businesses and households, government agencies, and other organizations. 

The data is then used to create a weighted average of prices, with weights assigned to each item based on its share of total consumer spending. The PCE index is divided into two main components: goods and services. 

The goods component includes durable goods (such as cars and appliances) and nondurable goods (such as food and clothing). The services component includes things like healthcare, housing, and transportation.

How does PCE affect inflation?

Now here is where the rubber meets the road. Inflation is the rate at which prices for goods and services increase over time. When prices rise, it becomes more expensive for consumers to purchase goods and services, which can lead to a decrease in purchasing power (or, as I call it, shrinking wallets). 

This can have a negative impact on the economy, as it can lead to a decrease in consumer spending and a slowdown in economic growth.

PCE is an essential measure of inflation because it provides policymakers with information about how much prices are rising. 

If the PCE index is increasing faster than desired, it may signal that inflation is becoming a problem. In response, policymakers (A.K.A the Fed) may take actions to try to slow down inflation, like hiking up interest rates.

Furthermore, PCE is used by the Federal Reserve to set inflation targets. The Federal Reserve aims to keep inflation at a target rate of 2%, and it uses PCE as a key indicator of whether it is meeting this target. 

With inflation consistently above this mark, the Federal Reserve needs to adjust its monetary policies to try to bring it back in line with the target. 

Bottom Line

The PCE is an important measure of inflation closely monitored by economists, policymakers, and investors. It provides information about how much prices are rising, which can significantly impact the economy. 

By tracking PCE, policymakers can take action to try to manage inflation and promote economic stability. At least, that’s how it should be on paper. 

What do the most recent numbers say about our economy as worries about inflation and banking increase? What can we do about it? Tune into the latest episode and find out what’s happening behind the curtains!