How to read the US PCE inflation report

What the PCE report is and when it comes out

PCE stands for personal consumption expenditures. The PCE price index tracks changes in the prices of goods and services bought by or on behalf of US households. It is published by the Bureau of Economic Analysis (BEA), a part of the Commerce Department.

The index appears in the monthly Personal Income and Outlays release, usually near the end of the month, at 8:30 AM ET. It covers the previous month, so it arrives after CPI and PPI for the same period. The same release also reports personal income, consumer spending and the saving rate.

• Publisher: Bureau of Economic Analysis
• Release: Personal Income and Outlays, monthly
• Time: 8:30 AM ET, usually late in the month
• Covers: the prior calendar month

Headline vs core PCE

Headline PCE includes every item in the index. Core PCE removes food and energy, two categories whose prices swing sharply with weather, harvests and oil markets.

Both are reported as a month-over-month change and a year-over-year change. The monthly figure shows recent momentum. The yearly figure smooths out noise but can be pulled around by what happened twelve months earlier, called a base effect. Many traders and Fed officials pay closest attention to core, because it tends to give a clearer read on underlying inflation trends.

• Headline: all items, including food and energy
• Core: excludes food and energy
• Month-over-month: short-term momentum
• Year-over-year: longer trend, compared with the 2% target

Why the Fed uses PCE for its 2% target

The Federal Reserve states its inflation goal as 2% measured by the annual change in the PCE price index. Officials discuss core PCE often because it helps them see where inflation is heading.

The Fed prefers PCE for a few reasons. It covers a wider range of spending, it adjusts as consumers switch between products when prices change, and past data can be revised as better information arrives. Because the target is written in PCE terms, this report feeds directly into how markets estimate the path of interest rates.

How PCE differs from CPI

CPI, the consumer price index from the Bureau of Labor Statistics, measures what urban consumers pay out of pocket. PCE has a broader scope: it also counts spending made on behalf of households, such as employer-provided health insurance and government programs like Medicare and Medicaid.

The weights differ too. Housing carries a larger share in CPI, while health care carries a larger share in PCE. The formulas also differ: PCE uses a chain-type formula that accounts for consumers substituting cheaper goods, while CPI uses a fixed basket updated less often. For these reasons the two measures often move together but rarely match exactly.

• Scope: PCE includes spending made on behalf of households
• Weights: housing heavier in CPI, health care heavier in PCE
• Formula: PCE captures substitution between products
• Source: PCE from BEA, CPI from BLS

Why CPI and PPI give early clues

Many PCE components are built from CPI and PPI data. PPI, the producer price index, supplies prices for items such as airfares, some medical services and portfolio management fees that CPI measures differently or not at all.

After CPI and PPI are released, economists translate them into estimates of core PCE. As a result, forecasts often narrow before the PCE report itself. This is one reason PCE surprises have tended to be smaller than CPI surprises, though large misses still happen, especially when revisions to earlier months are significant.

• Read CPI and PPI for the same month first
• Note how PCE forecasts change after those releases
• Check revisions to prior months in the PCE report

How markets react to a surprise

Markets respond to the gap between the actual number and the consensus forecast, plus how the data changes the outlook for Fed policy. A figure in line with expectations often produces little lasting movement.

When core PCE has come in hotter than expected, Treasury yields and the US dollar have tended to rise and stock index futures have often come under pressure, as traders price in higher rates for longer. Cooler readings have tended to produce the opposite. Exceptions are common: revisions, the income and spending data, other news that day and existing positioning can all change the reaction.

• Compare actual vs consensus for core month-over-month
• Check whether prior months were revised up or down
• Look at spending and income, released at the same time
• Consider what the market already expected from CPI and PPI

Key terms

PCE price index

A BEA measure of price changes for goods and services bought by or on behalf of US households.

Core PCE

The PCE price index excluding food and energy, used to gauge underlying inflation.

Headline PCE

The full PCE price index, including food and energy.

Consensus forecast

The median estimate from economists surveyed before a data release.

Base effect

A distortion in a year-over-year rate caused by an unusually high or low reading twelve months earlier.

Chain-type index

A price index whose weights update over time to reflect consumers shifting between products.

Revision

A change to previously published data as more complete information becomes available.

PPI

The producer price index, which tracks prices received by domestic producers and supplies some inputs to PCE.