What is the PCE Index?

Published by Thomas Herold in Economics

'PCE Index' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The PCE Index stands for personal consumption expenditures. This economic index is used to quantify the changes in the prices of consumer services and goods. The expenditures which are included in the index are real expenditures that the U.S. government claims actual households in the U.S. spend.

The index measures data that covers non durable goods, durable goods, and services. It does share some important characteristics with the CPI Consumer Price Index, though it filters out wildly swinging commodities’ prices. The Department of Commerce’s Bureau of Economic Analysis includes the PCE in the personal income report which it issues.

Many officials and economists consider the PCE Index to be very predictable. This is one of the features they like about it. Other analysts favor the CPI over the PCE because they claim that it helps to discern if there is economic stability or not. CPI utilizes a fixed, set basket of goods in its calculations. The Department of Commerce likes that PCE smoothes out the inflation numbers to eliminate speculative trading based price changes in commodities.

The Federal Reserve also prefers the PCE Index to CPI. CPI may be the better known economic indicator. The Fed still chooses the PCE as its favored index as it considers the conditions in the economy. The PCE helps the American central bank to determine its plans of action which will influence employment and inflation.

The Fed has a reasoning for choosing the PCE Index. It likes the variety of expenditures which the PCE covers. CPI is more limited in utility to them precisely because its basket components are always fixed. In contrast, the PCE manages to consider a wide range of expenses that actual homes spend money on around the United States. The PCE data comes from business surveys, which are usually more reliable than those consumer based surveys that the CPI employs.

The formula of the PCE Index is also useful. It takes into account alterations in the consumers’ behavior over the short term. The competing CPI does not factor in such an adjustment. All of these characteristics when taken together lead to a better rounded and all inclusive measurement of inflation. The Fed relies on the slight nuances which the PCE divulges. To them, even tiny quantities of inflation represent an economy which is healthy and expanding.

While the PCE Index breaks down to two main categories of goods and services, it subdivides the primary category of goods into two further ones. These subdivisions within goods are called durables and non durables. Durable goods refers to those which a household will be able to utilize for over three years. They come with higher price points.

In the durable goods category are televisions, cars, furniture, and refrigerators. Non durable goods are those referred to as transitory. This means that they have a life expectancy which is shorter than three years. Such items cost less and are constantly consumed. Examples of  non durables include clothes, food, gasoline, and makeup.

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The term 'PCE Index' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.