It doesn’t get the media attention like its cousin, but the academic-sounding Personal Consumption Expenditures is the inflation gauge favored by the Federal Reserve. So investors should watch it carefully.
As its name suggests, the better-known Consumer Price Index measures price changes in things consumers are buying with money out of their pocket. It uses the same basket of goods for two years to determine overall price trends. The CPI tends to show a higher inflation rate than its more sophisticated price partner, the PCE.
The PCE measures price changes by looking at what businesses are charging. It also swaps out items to mimic when consumers change products. For instance, if your auto insurance goes up, you shop for cheaper coverage. The PCE formula works to capture that change. And it changes the spending categories it measures more frequently than the CPI. How important each category of spending is to each inflation measurement is important, too. The CPI tends to favor housing costs more than the PCE.
All this matters because it matters to the Federal Reserve and it thinks inflation has room to run. The central bank likes to focus on core inflation — that is price changes that leave out food and energy. (While all of us pay those prices, grocery and gasoline costs can be volatile month to month.)
One of the Fed’s two mandates is for stable prices. Its target inflation rate is 2 percent; though don’t think of it as a hard and fast rule. The CPI core rate was up 1.8 percent in February from a year ago. The latest PCE will be released Thursday in the week ahead. In January, it was up 1.5 percent from a year earlier.
The difference may not seem like much to your household budget. But it could be the difference between the Federal Reserve more aggressively raising interest rates, or not.
Tom Hudson hosts “The Sunshine Economy” on WLRN-FM; @HudsonsView.