Personal Consumption Expenditures (PCE)

What is PCE?

Personal Consumption Expenditures (PCE) measures the value of goods and services purchased by or for U.S. consumers. Compiled by the Bureau of Economic Analysis (BEA), PCE represents roughly two-thirds of domestic spending and is a major component of gross domestic product (GDP). The BEA reports PCE monthly in its Personal Income and Outlays release.

Why PCE matters

• PCE shows how households allocate spending among goods, services, and savings, providing insight into economic strength and consumer behavior.
• Businesses use PCE data to plan production, hiring, and investment.
• Policymakers and economists use PCE trends to assess demand and guide fiscal and monetary decisions.

The PCE Price Index (PCEPI)

The PCE Price Index measures changes in the prices consumers pay for goods and services and is a key gauge of inflation.

Two main measures:
– Headline PCEPI: includes all spending categories.
– Core PCEPI: excludes food and energy to reveal underlying inflation trends, since food and energy prices are often more volatile.

PCEPI is derived from PCE spending data and is expressed as the change in prices from one period to the next.

Why the Federal Reserve prefers PCEPI

The Federal Reserve uses the PCEPI as its preferred inflation measure because:
– It better captures changes in consumer behavior (substitution across goods).
– It covers a broader range of expenditures, including purchases made on behalf of households (e.g., employer-paid health insurance).
– Its weighting and data sources (including business surveys) provide a more comprehensive and regularly updated inflation picture than some alternatives.

Other inflation measures include the Consumer Price Index (CPI), Producer Price Index (PPI), and the GDP Price Index.

How PCE is measured

PCE is reported in both current (nominal) and chained (real) dollars. The BEA aggregates spending into:

• Durable goods (lasting >3 years): motor vehicles, appliances, electronics, furniture.
• Nondurable goods (lasting <3 years): food and beverages bought off-premises, clothing, gasoline.
• Services: housing and utilities, healthcare, transportation, recreation, food services, financial services, insurance, etc.

PCE includes:
– Household purchases from private businesses and government.
– Spending by nonprofit institutions serving households.
– Purchases of used goods and U.S. residents’ purchases abroad.
– Third-party spending on behalf of households (e.g., employer-paid health care, government-financed medical care).

Data are available at national and state levels; the BEA issues monthly and more detailed annual reports.

Advantages and limitations

Advantages
– Broad coverage of consumer spending gives a strong indicator of economic health.
– Helps reveal shifts in demand, which influence business and policy decisions.
– Aggregates many categories, reflecting actual market behavior.

Limitations
– Subject to measurement and classification errors in source data.
– Estimates are revised periodically, which can change historical readings.
– Some observers note challenges in valuing all personal consumption components precisely.

Recent trends

Recent BEA reports have generally shown modest month-to-month increases in personal income and PCE, with core PCE (excluding food and energy) often rising slightly while headline PCEPI has been relatively flat. These patterns reflect ongoing shifts in consumer behavior and price pressures; consult the latest BEA Personal Income and Outlays release for current figures.

PCE vs. CPI (brief)

• CPI (Bureau of Labor Statistics): based on a fixed basket and household surveys, focused on out-of-pocket consumer purchases.
• PCE (BEA): covers a broader spending universe (including third-party payments), updates weights more frequently, and accounts for substitution in consumer choices—features that make PCEPI more suitable for some policy uses.

Key takeaways

• PCE measures consumer spending and is central to assessing U.S. economic activity.
• The PCE Price Index (and core PCE) is a primary inflation gauge used by the Federal Reserve.
• PCE’s breadth and methodological features give it advantages for tracking price dynamics, but data are subject to revisions and measurement limitations.

Sources: U.S. Bureau of Economic Analysis; Board of Governors of the Federal Reserve; U.S. Bureau of Labor Statistics.