PCE (Personal Consumption Expenditures Price Index)
A price gauge based on what consumers actually spend — the measure the Fed weighs most when judging its inflation target (2%).
PCE Price Index = prices indexed to reflect households' actual consumption spending (released by the U.S. Department of Commerce)
It is read this way: the further core PCE moves from the 2% target, the greater the pressure for rate hikes; the closer it gets, the greater the expectation of easing.
In plain terms
Like CPI, PCE measures prices, but it reflects more of "where people actually spent their money." Because it captures consumer behavior such as switching to cheaper items when prices rise, it is sometimes regarded as closer to reality than CPI.
When weighing its price target (2%), the Fed looks at this PCE (especially core PCE) rather than CPI. That is why it is called "the inflation measure the Fed really watches."
What it tells you
Since it is the price gauge the Fed weighs most when setting rates, PCE is a hint about "the Fed's next move." It is released later than CPI but carries more weight.
Core PCE is PCE excluding volatile energy and food. The Fed's 2% target is based on this core PCE.
Formula
PCE Price Index = prices indexed to reflect households' actual consumption spending (released by the U.S. Department of Commerce) The Fed's price target (2%) is usually based on core PCE
What high or low means
It is read this way: the further core PCE moves from the 2% target, the greater the pressure for rate hikes; the closer it gets, the greater the expectation of easing.
When CPI and PCE move in the same direction, the price trend is clear; when they diverge, the two gauges are painting different pictures (the Fed gives priority to PCE).
CPI and PCE use different calculation methods and item weights, so the figures come out differently. PCE tends to come in lower than CPI, so mixing the two up in a comparison leads to misunderstanding.
PCE is released later than CPI. CPI is the faster read, while PCE is what the Fed uses for policy.
PCE is a macro indicator. This term is background knowledge for understanding market news. (※ Our screens deal with individual companies' SEC-filed financials.)
Metrics to read alongside
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This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.