By October 24, 2023

Americans cut back at restaurants and hotels, but spent more on financial services, insurance, and health care, as well as a few recreational activities like gambling. Friday’s data continue to prove that consumers were only too happy to splurge over the holidays. Durable goods, such as furniture and cars, saw a 1.5% uptick in spending from November. — Oil prices settled higher Friday to end the week at nearly two-month highs as healthy U.S. economic growth and signs of Chinese stimulus supported the crude demand outlook, prompting… Ahead of the Fed decision, the EUR/USD pair’s local downtrend has slowed near 1.08.

This information is important for economic policy purposes and business decision-making. While CPI is more important from the perspective of an individual, PCE is more important from the perspective of monetary policy. The broader scope of PCE makes it better suited to indicate long-term inflationary trends according to the Fed. But after stripping out food and fuel costs, which can move around from month to month, a “core” price index climbed 2.9 percent from December 2022. That followed a 3.2 percent November reading, and was the coolest since March 2021.

  1. Annual core PCE inflation in December dropped slightly from November’s reading of +3.2% year over year.
  2. This evidence suggests that the first release of the index excluding food and energy should be interpreted with care.
  3. First, in each month there is a wide distribution of price changes (Panel A of Figure 1); it is precisely this dispersion that makes it difficult for policymakers and others to interpret high-frequency inflation readings.
  4. The CPI reflects out-of-pocket expenditures of all urban households, while the PCE price index also includes goods and services purchased on behalf of households.

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security.

The above chart is illustrative but may not reflect current values. The comparisons in the table above will vary over time as the relative weights of the components of the indexes change. The chart below breaks down the differences between the CPI and PCE into these four effects for each quarter starting in 2007.

Core PCE data and other inflation indicators influence interest rate differentials between two or more countries. If the Core PCE reading suggests higher inflation in one country compared to another, it can lead to a divergence in interest rates between the two economies. Higher interest rates can attract capital flows and increase demand for the currency of the country with relatively higher rates. Therefore, a stronger Core PCE reading in the US compared to other countries may appreciate the USD against those currencies. Gold finished lower last week due to a slightly hawkish shift in Fed rate cut expectations
Traders are closely monitoring central bank meetings (BOJ, ECB), global PMIs, and US GDP/PCE inflation…

How is Core PCE measured?

When Core PCE shows higher-than-expected inflation, it suggests increased price pressures on consumer goods and services. This can lead to expectations of tighter monetary policy by the Federal Reserve. The Federal Reserve may consider raising interest rates to curb price growth in response to higher inflation. Higher interest rates make holding USD-denominated assets more attractive to investors, increasing demand for the currency and potentially strengthening its value against other currencies in the forex market. The gain in the core personal consumption expenditures price index, which excludes the more volatile costs of food and energy, slowed to 2.9% year over year in December, according to data released by the Bureau of Economic Analysis.

There are other differences that include the source(s) used for an item’s price and seasonal adjustment procedures. Taken together, the differences in the two indexes result in CPI inflation readings that are generally higher than PCE inflation readings as shown in the chart for the 1995–2016 period. Gold price (XAU/USD) is expected to come out of the woods as the US Core Personal Consumption Expenditure – Price Index (PCE) report for December what is adx shows a slower pace growth in price pressures than what anticipated by market participants. The annual underlying inflation data slowed to 2.9% from expectations of 3% and the former reading of 3.2%. Monthly core PCE price index data grew by 0.2% as anticipated by the market participants. Easing price pressures would escalate bets advocating for a rate-cut decision by the Federal Reserve (Fed) in the March monetary policy meeting. — Underlying U.S. price growth rose by 0.2% as expected in December, a rate that, if sustained, many economists believe could help cool inflation back down to the Federal Reserve’s… Updated each month by the Bureau of Economic Analysis, the PCE tracks what kinds of goods and services consumers buy and how much they pay for them, as well as how consumers change their spending habits when prices rise or fall. There are other measures of consumer price inflation that either provide alternatives to or a different focus than those previously discussed. One drawback of the PCE price index, however, is that it can be substantially revised, while the (non-seasonally adjusted) CPI is never revised.

Interest rates FAQs

To derive the Core PCE, the BEA excludes the volatile food and energy components from the overall PCE calculation. This allows for a focus on the underlying inflation trends, providing a more stable measure of inflation. While the CPI and PCE price index both provide measures of how prices are changing over time, they are not constructed in the same way. One difference is the smaller number of items in the basket of the CPI. The CPI reflects out-of-pocket expenditures of all urban households, while the PCE price index also includes goods and services purchased on behalf of households.

What is the Fed Funds rate?

This figure can provide an idea of economic strength and how price changes can affect spending. The Fed too has given preference to PCE due to its broader scope and “chained base” for calculations. The Fed serves a dual mandate, price stability, and strength in employment. The Fed has said it would raise rates only when the economy achieves 2% core PCE inflation. The rate hike would affect both the U.S. equity (SPY), bonds (BND), and Treasury (TLT) markets. The CPI and PCE do not cover identical categories of personal spending.

Gold price stands tall near one-month peak as spotlight shifts to US NFP report

Also, the PCEPI uses a chained index which compares one quarter’s price to the previous quarter’s instead of choosing a fixed base. This price index method assumes that the consumer has made allowances for changes in relative prices. That is to say, they have substituted from goods whose prices are rising to goods whose prices are stable or falling. Given economists’ congenital on-the-one-hand-on-the-other proclivities, do not bother asking us which measure is best (at the CEA, we equally love all of our children!). They each have their attributes and, as the first figure shows, closely track each other (and, in fact, share most of their source data). Another aspect of the baskets that leads to differences is referred to as coverage or scope.

The personal consumption expenditures price index, or PCE, measures changes in consumer spending on typical goods and services. It’s used to calculate inflation (or deflation) in the U.S. economy. The personal consumption expenditure (PCE) measure is the component statistic for consumption in gross domestic product (GDP) collected by the United States Bureau of Economic Analysis (BEA). It consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services.

Inflation has been slowing swiftly, and fresh data showed that a core price gauge fell below 3 percent for the first time in years last month. Inflation has been a nettlesome problem since the early days of the Covid pandemic, when price increases surged to their highest levels since the early 1980s. The Fed initially expected the acceleration to be temporary, then responded with a series of interest rate hikes that took its benchmark rate to its highest in more than 22 years.

The real question is what the latest data mean for the timing of rate cuts over the course of the year. The forecasting exercise is run in real time, meaning that we construct our forecasts using the actual vintages of data that were available at each point in time. The first forecast we produce is for inflation over the 24 months from June 2005 to June 2007, using data available as of June 2005. Next, we produce a forecast for July 2007 using the data available as of July 2005.