Weekly reviews

Breaking Down Fed’s Favourite Inflation Benchmark

Personal Consumption Expenditures or simply the PCE Index will be released on Thursday as of 13:30 GMT, with a core measure standing at an annual growth rate of 1.4 percent and a month-over-month increase of a mere 0.2 percent.

 

Wait a minute… why I am bringing up this issue now? Just because the PCE Index is seen as one of the Federal Reserve favourite inflation benchmarks, meaning this report has the power to affect expectations for further monetary policy adjustment in the world’s first economy.

 

I know how this work. You’ve heard about the PCE Index a thousand times but you’ve never had enough time (or interest) to read about it. And here we meet again...

 

The PCE Index gauges changes in prices of consumer goods and services by looking at expenditures attributed to households all across the United States.

 

This index is prepared by the Bureau of Economic Analysis of the Department of Commerce and published as part of the monthly personal income report. Therefore, if you hear “personal spending”, you also hear PCE.

 

So… Why the Fed prefers the PCE Index against the well-known CPI?

 

The Consumer Price Index works amazingly to display shifts in consumption patterns, but only within a tight category of assets tracked by the index. On the other hand, the PCE Index covers a larger spectrum of assets, making it a more inclusive and real measure for policymakers.

 

Also, the PCE is weighted by information obtained from business surveys, making one step more reliable compared to consumer surveys used for the CPI.

 

An important division: Durables / Non Durables

 

The PCE is divided in two categories: durables (goods) and non durables (services). Of course, the main focus of these two falls into the first one as that’s where most money goes: from electronics to transports or decoration.

 

Next time you read about the PCE Index, you will be ready to take action!