Personal Consumption Expenditures (PCE) is a vital indicator in the U.S. economy, measuring all spending by U.S. residents on goods and services. This indicator includes not only our daily purchases of non-durable goods such as food and clothing, but also durable goods like cars and furniture, as well as various services including housing, healthcare, and education.
How to Calculate PCE？
The chained Fisher formula, used to calculate price indices, is a formula commonly employed to measure the overall change in the price of a basket of goods or services over a period of time. It combines the advantages of the Laspeyres index and the Paasche index (detailed in the CPI section) and is considered a more ideal method for calculating price indices. It is widely used in the calculation of various economic indicators, including PCE, and can more accurately reflect the actual changes in prices.
Determining the basket of goods and services: PCE covers all goods and services purchased by consumers, including durable goods (such as cars and furniture), non-durable goods (such as food and clothing), and services (such as housing and healthcare).Collecting price data: The U.S. Bureau of Labor Statistics collects price data for these goods and services every month.Calculating expenditure weights: The weight of each item in overall consumer spending is calculated based on consumer spending on different goods and services.Applying the chained Fisher formula: The chained Fisher formula is used to combine the price change of each item with its weight to calculate the change in the overall price index.
Advantages of PCE compared to CPI
More Comprehensive: PCE covers a wider range of goods and services than CPI, thus providing a more comprehensive picture of consumer spending.More Flexible: PCE's weights are regularly adjusted, making it more responsive to changes in consumer behavior.More Reflective of Reality: PCE includes not only goods and services directly purchased by consumers but also expenses paid on their behalf by employers or the government, such as healthcare, thus better reflecting actual consumer spending.Preferred by the Federal Reserve: Although CPI is more widely known, the Federal Reserve prefers PCE as a reference for monetary policymaking, as it provides a more comprehensive and accurate picture of inflation.
PCE is a more comprehensive and flexible indicator that reflects the actual spending and inflation of American consumers. By updating weights monthly and adopting the chained Fisher formula, PCE adapts more flexibly to changes in consumption habits and captures price changes more accurately, providing a crucial reference for the Federal Reserve in formulating monetary policy.
