Personal Consumption Expenditures Explained

Personal consumption expenditures, or PCEs, refer to a measure of consumer spending over a set period. PCEs indicate what the consumers in the US economy spend on goods and services. PCEs help form the Personal Consumption Expenditures Price Index (PCEPI), a key economic indicator. The US Bureau of Economic Analysis, or BEA, releases the number monthly in the Personal Income and Outlays report.

The PCEPI is distinct from the core PCE price index, which excludes food and energy prices. Since these items are generally more volatile than other goods and services, excluding them provides a more accurate measurement of the overall economy.

PCEs give economists and financial institutions, officials, and reporters a measure of consumer behavior. PCEs indicate what people are spending their money on and how this changes over time. Economists can compare this measurement to how much US residents earn or to spending trends at a particular time in the past, indicating the overall status of an economy.

The PCE Price Index (PCEPI) is a number that gives a snapshot in time of what consumers are spending on goods and services. The Bureau of Economic Analysis’s methodology uses information from households and data gathered from corporations and government agencies. This information allows economists to measure the inflation rate, among other things.

The US Federal Reserve bank uses the PCEPI as the primary measure of inflation and deflation. This change, which occurred in 2012, marked a shift from using the Consumer Price Index (PCI) as the primary indicator. The use of this measure by the US Fed is significant, as it helps them make decisions about monetary policy, such as setting interest rates, which can lead to large-scale, long-term changes in the economy.

The PCEPI uses information collected from businesses, households, government agencies, and the gross domestic product (GDP); the CPI relies on data compiled from household surveys issued by the US Bureau of Labor Statistics (BLS). The CPI shows slight differences in categories, allowing for granular detail about different specific goods and services, while the PCEPI shows more comprehensive information about changes over time.

There are some distinct advantages to using the PCEPI, which are reflected in the preference of the US Fed for this economic measure. The PCEPI calculation uses a broader range of consumer goods and services. These are broken down into durable goods (items like cars, washing machines, and refrigerators), nondurable goods (like food and clothing), and services, which include everything from the financial services provided by banks to restaurants and healthcare. While more detailed in this respect, the PCEPI is less volatile in its reporting, not showing the large swings caused by short-term spikes in gasoline prices, for instance. Gathering information from nonprofits, businesses, and local governments helps provide a broad picture.

There are a few disadvantages to using the PCEPI. While the PCEPI is a broader and more complete dataset when compared to the CPI, it has the disadvantage of lacking granular detail. The PCEPI metric cannot capture small price changes of specific items.

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