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Personal Consumption Expenditures (PCE)

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Personal consumption expenditures (PCE) is a measure of the prices people in the United States pay for goods and services. According to the Bureau of Economic Analysis (BEA), PCE accounts for about two-thirds of domestic spending and is a significant driver of gross domestic product (GDP).

An estimated total of personal consumption expenditures (PCE) is compiled by the U.S. government monthly as one way to measure and track changes in the prices of consumer goods over time. Personal income statistics, including PCE and the PCE Price Index (PCEPI), are released monthly in the BEA Personal Income and Outlays report. Personal consumption expenditures support the reporting of the PCEPI, which measures price changes in consumer goods and services exchanged in the U.S. economy.

How Personal Consumption Expenditures Are Measured

Like most economic breakdowns, PCE is split between consumer goods and services. The BEA reports the total value of personal consumption expenditures collectively every month. This is broken down by goods, including durable goods and nondurable goods, and services.

Durable goods are pricier items that last longer than three years. Examples include cars, electronics, appliances, and furniture. Non-durable goods have a life expectancy of under three years. These include products like cosmetics, gasoline, and clothing. Services are tasks performed for the benefit of the recipient. Examples of services are legal advice, house cleaning, and plumbing.

Tracking the Numbers

The BEA uses the current dollar value of PCE to calculate the PCE Price Index. This index shows the price inflation or deflation that occurs from one period to the next. Like most price indexes, the PCEPI must incorporate a deflator (the PCE deflator) and real values in order to determine the amount of periodic price change.

Both the PCE Price Index and the Core PCE Price Index (excluding food and energy) show how much the prices of personal consumption expenditures have changed from one period to another. Breakdowns of the PCEPI show PCE inflation/deflation by category as well.

PCE Price Index (PCEPI) vs. Consumer Price Index (CPI)

The CPI is the best-known economic indicator and gets the most attention from the media. But the Federal Reserve prefers to use the PCE Price Index when gauging inflation and the overall economic stability of the United States.

Why does the Fed prefer the PCE Price Index? This metric is composed of a broad range of expenditures. The PCEPI is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI.3

The CPI, on the other hand, provides more granular transparency in its monthly reporting. Economists studying the data can clearly see categories like cereal, fruit, apparel, and vehicles.4

Another difference between the PCEPI and CPI is that the PCEPI uses a formula that allows for changes in consumer behavior and changes that occur in the short term. These adjustments are not made in the CPI formula.4

These factors result in a more comprehensive measure of inflation. The Federal Reserve depends on the nuances that the PCEPI reveals because even minimal inflation can be considered an indicator of a growing economy.

Advantages and Disadvantages of Personal Consumption Expenditures (PCE)

Personal consumption expenditures data provide a glimpse of how the economy is faring. When people are spending without hesitation, it usually means that the economy is doing well. When they cut back on spending, it points to problems in the overall economic picture.

Advantages

The PCE Price Index isn’t as well known to the general public as the CPI. While the CPI uses household surveys created by the Bureau of Labor Statistics (BLS) to determine the direction of prices, the PCEPI is much broader. That’s because it takes data directly from businesses and corporations while taking GDP into account.

The PCEPI considers a broader spectrum of goods and services, notably those purchased by all households across the country. The CPI accounts only for households in urban settings.5

The personal consumption expenditures price index is also much less volatile compared to the CPI, which is influenced by major price movements in certain products like gasoline. The PCEPI smooths out any major swings.

Disadvantages

While it is the preferred metric used by the Fed, there are some distinct problems with the PCEPI. One is that it takes into account GDP—a figure that is only measured and reported on a quarterly basis. But the PCE is reported every month by the BEA. The agency must fill in the gap by using retail sales every month.7

Another disadvantage to the PCEPI is that it is far too broad. It uses information from both households and other entities such as nonprofits, governments, and corporations.8 The CPI, on the other hand, provides data that is directly reported specifically from consumers.

Pros

  • Accounts for price data from businesses and corporations, along with GDP
  • Observes a wider range of people, including all households and organizations.
  • Isn’t influenced by major price swings making PCEPI less volatile than CPI

Cons

  • Reported monthly but uses GDP in its formula, which is reported quarterly
  • PCEPI uses information from other entities while CPI only takes data directly from consumers