The Personal Consumption Expenditures Price Index (PCE) is an economic indicator that shows price changes in consumer spending on goods and services in the United States.
The PCE is an indicator used to monitor changes in the overall level of consumer spending. The index is calculated by taking into account the weights of consumer expenditures on different goods and services. Therefore, it has a structure that varies according to the components of consumer expenditures. The PCE is usually evaluated by comparison to the Consumer Price Index (CPI), another indicator used to measure inflation in the United States.
Why Is It Important?
The Fed and the other economic decision-makers use the Personal Consumption Expenditures Price Index as an important indicator to assess the course of inflation and shape monetary policies. Since the index shows consumer prices, that is, changes in inflation, it has an impact on economic growth, increase in wages, tax policies and other economic factors. Therefore, the index has a direct impact on the Fed's decisions.
The Latest PCE Data
The U.S. Personal Consumption Expenditures Price Index (PCE) for April 2023 came in at 4.4%, beating expectations of 3.9%. This unexpected increase strengthens the idea that the Fed may increase interest rates. The fact that the rate of decline in inflation is decreasing and that the effect of sticky inflation is still felt in the core PCE supports this data. The Fed’s next meeting will take place on June 13–14. Following the release of the data, surveys found the probability of a rate hike to be 55%.
Source: : fedwatchtool
A high PCE value usually shows that inflation and prices are rising. The Fed makes its interest rate decision to control inflation and stabilize the economy. A high PCE value increases the likelihood of an interest rate hike. However, the Fed’s interest rate policy depends on many factors. While a high PCE value alone does not guarantee an interest rate hike, it could trigger the Fed’s willingness to raise interest rates.
Even though a high PCE value may increase the likelihood of the Fed raising rates, as we can see from surveys, it is important to remember that interest rate policy is a complex evaluation process.
