The Personal Consumption Expenditures Price Index, the Federal Reserve's preferred inflation measure. PCE covers a broader range of spending than CPI and adjusts for changes in consumer behavior.
What the PCE Price Index Measures
The PCE Price Index measures price changes for goods and services consumed by individuals, published monthly by the Bureau of Economic Analysis. Unlike the Consumer Price Index (CPI), PCE uses a chain-weighted formula that accounts for consumers substituting cheaper alternatives when prices rise. It also includes expenditures made on behalf of consumers, such as employer-paid healthcare.
Why the Fed Prefers PCE
The Federal Reserve explicitly targets 2% annual core PCE inflation. The Fed prefers PCE over CPI for several reasons: its broader coverage of spending, its chain-weighting methodology (which avoids overstating inflation), and its inclusion of spending by nonprofits and employers on behalf of consumers.
Core PCE (excluding food and energy) is the specific measure referenced in Fed communications and dot plot projections. This makes core PCE releases among the most important scheduled events for U.S. Dollar (USD) traders.
Market Impact
PCE data is released on the last Friday of each month. While it often confirms what CPI already showed, surprises in core PCE can cause significant dollar volatility because of its direct connection to the Fed's inflation target.
Related Terms
Consumer Price Index (CPI)
A measure of the average change in prices paid by consumers for a basket of goods and services over time. CPI is the primary gauge of inflation used by central banks to guide monetary policy decisions.
Core CPI
The Consumer Price Index excluding volatile food and energy prices. Core CPI provides a cleaner view of underlying inflation trends and is closely watched by central banks when setting monetary policy.
Inflation
A sustained increase in the general price level of goods and services, reducing purchasing power. Central banks target specific inflation rates (typically 2%) and adjust monetary policy to achieve that target.
Federal Reserve
The central bank of the United States, commonly called the Fed, responsible for setting US monetary policy through the FOMC. It manages the US dollar, the world's primary reserve currency.
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