Personal Consumption Expenditure – An Inflation Measure

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

Personal Consumption Expenditure (PCE) measures the price paid for goods and services by consumers. It reflects changes in consumer behavior and captures inflation (or deflation) across a wide range of consumer expenses. Prices for both goods and services are measured. Durable goods are items or possessions that last longer than three years, such as furniture, cars, appliances, etc. Nondurable goods include everything else. Services include labor or actions across all sectors of the economy.

Sometimes PCE is expressed in terms of core PCE which excludes food and energy from the mix. Their exclusion is meant to make the underlying inflation trend clearer by excluding the two relatively more volatile items. PCE is computed by the Bureau of Economic Analysis (BEA), a government agency. According to the BEA, PCE is a significant driver of the U.S. gross domestic product (GDP). PCE can be an indicator of economic strength. It reflects price changes which may affect consumer spending.

Personal Consumption Expenditure

The Federal Reserve (Fed) has an inflation target of 2.0%. Their preferred measure of inflation is PCE which has averaged approximately 2% over the last 30 years (1.99%). PCE spiked during the COVID pandemic to a high of 5.57% and although it has tailed off considerably since then, it remains historically elevated at 2.75%. The market has focused on inflation, thinking that the Fed’s policy would change as soon as it is under control and close to its 2% goal. Although inflation is running high, consumer spending has been steady and the economy has been resilient; therefore, the Fed has not needed to reverse its monetary policy.