The Fed Comparing Two Measures of Core Inflation: PCE Excluding Food & Energy vs the Trimmed Mean PCE Index

The differing PCE and CPI estimates are primarily due to differences in computation. Incorporating Core PCE data into trading strategies enables traders to enhance their decision-making processes and potentially improve trading outcomes. By considering the potential impact on interest rates and adjusting their trading strategies accordingly, traders can capitalize on opportunities in the forex market. Core PCE, the Federal Reserve’s (Fed) favorite gauge of inflation, printed 0.1% advance every month – it was softer than expected, core PCE fell to 3.2%…

  1. Hence, to the extent that the empirical distribution of individual consumer price changes tends to exhibit fat tails, a trimmed-mean inflation measure might be viewed as preferable to an exclusion measure on purely statistical grounds.
  2. For example, a drought can cause dramatic effects on the prices of crops.
  3. Some observers feel that this reflects the inability to value personal consumption expenditures accurately.

Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation. The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 2.9% in December from a year earlier, according to the Bureau of Economic Analysis. The Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures index, should show continued progress on the central bank’s goal of 2% price growth when it’s released Friday. The headline personal consumption expenditures inflation rate, which includes food and energy prices, was 2.6% year over year, in line with expectations and holding steady with the pace recorded in November.

In addition, our Inflation 101 section provides explanations of many related concepts, such as aggregate and underlying inflation. Progress on disinflation comes even as the economy has expanded at a healthy clip, with real gross domestic product growing 3.3% in the fourth quarter. That growth was driven in large part by consumer spending that was bolstered by easing price pressures, a solid labor market, and resilient wage growth. To summarize, despite their methodological differences, both indexes appear capable of reducing the variance of total inflation while capturing the location of the overall distribution of price changes. First, in each month there is a wide distribution of price changes (Panel A of Figure 1); it is precisely this dispersion that makes it difficult for policymakers and others to interpret high-frequency inflation readings.

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The statistical motivation for the trimmed-mean measure is that a suitably chosen trimmed mean will provide a robust estimator of the location of a fat-tailed distribution, while a weighted mean typically will not. Hence, to the extent that the empirical distribution of individual consumer price changes tends to exhibit fat tails, a trimmed-mean inflation measure might be viewed as preferable to an exclusion measure on purely statistical grounds. The consumer price index, or CPI, shares some similarities with the PCE. Both indexes measure consumer spending and focus on how the ever-changing prices of goods and services affect households, as opposed to companies or producers.

U.S. Core PCE Prices

Prescription drugs and gasoline also helped drive the December increase in spending. Higher wages and salaries were the main factor behind the increases, the bureau reported. The latest inflation data put the Federal Reserve in a relative sweet spot. Micron stock is set to struggle amid shrinking profit and revenue… The EUR/USD pushed higher in the first half of Wednesday’s session, boosted by positive signals from the equity markets, as the US dollar eased back against most major currencies.

Personal Consumption Expenditures (PCE): What It Is and Measurement

A higher-than-expected Core PCE reading may signal potential inflationary pressures and create investor uncertainty. In such cases, traders may seek major currencies with less volatility, such as the USD, to protect their investments. Whereas a lower-than-expected Core PCE reading may alleviate concerns about inflation and prompt investors to take on more risk, potentially favoring higher-yielding currencies over the USD. — The S&P 500 fell Thursday, pressured by a Meta-led slump in tech as concerns about slowing advertising growth offset better-than-expected quarterly results. — The Dow closed lower Thursday, pressured by a Meta-led slump in tech as concerns about slowing advertising growth offset better-than-expected quarterly results. The good news on inflation continued to roll in on Friday as Federal Reserve officials’ preferred metric revealed price pressures eased markedly in December.

Since 2000, core CPI has averaged annual increases of 3.9 percent, and core PCE has averaged 3.4 percent, the same half a percentage point difference as between the headline numbers. More recently, the differences have been smaller, with core inflation running at 2.0 percent for the CPI and 1.7 percent for the PCE since 2000, and 1.7 percent and 1.5 percent since 2008. The Core PCE index is an economic indicator measuring price changes for consumer goods and services, excluding food and energy. It is used to gauge inflation in the United States and is closely monitored by the Federal Reserve as it aids in guiding monetary policy decisions. The index assigns weights to items based on their total expenditure, providing a comprehensive measure of price changes from consumers’ perspective. This data is crucial for understanding inflationary pressures and making economic analyses.

Other measures of inflation tracked by economists include the Producer Price Index (PPI) and the Gross Domestic Product Price Index. Consumer spending is an important factor that drives the U.S. economy and is a key part of GDP. The Nonfarm Payrolls report is expected to show that the US economy added 180,000 jobs in the first month of 2024, down from a whopping 216,000 jobs created in December. Gold price oscillates in a narrow trading band during the European session on Friday and consolidates its weekly gains to a one-month peak touched the previous day. Traders opt to wait on the sidelines ahead of the release of the critical US jobs report. The graph above shows how the CPI has historically been higher than PCE estimates.

We then repeat the same procedure until June 2018, thereby yielding a total of 157 forecasts. The target is the annualized 24-month-ahead percent change in the total PCE price index computed using the latest available data (meaning the data published by the BEA on July 31, 2018). The PCE price index measures the change in the prices of goods and services consumed by all households and nonprofit institutions serving households. The PCE price index is constructed by the Bureau of Economic Analysis and is released toward the end of each month, with a one-month publication lag. More detailed information on the PCE index is available in this slideshow. The BEA reports the total value of personal consumption expenditures collectively every month.

Definitions and historical perspective
A consumer price index excluding food and energy was first reported by the Bureau of Labor Statistics (BLS) in the CPI Detailed Report for December 1975. Starting in 1978, this exclusion index was routinely included in the CPI Detailed Report; subsequently, a similar exclusion measure was computed for the price index for personal consumption expenditures in the national accounts. The CPI and PCE each come in two flavors, a so-called “headline” measure and a core measure, which strips out the more volatile food and energy components. Like the headline measures, core CPI tends to show higher inflation than core PCE.

For example, a drought can cause dramatic effects on the prices of crops. The effects on inflation can be brief, meaning they ultimately correct themselves and the market returns to a balanced state. As a result, food and energy prices for these goods are excluded from the calculation of core inflation. The two measures have different scopes as well—for example, PCE includes the price of all medical goods and services purchased by employer-provided insurance as well as public programs such as Medicare. CPI, in contrast, only includes medical items purchased out-of-pocket by households.

Both are commonly used to measure inflation, although economists prefer to use the PCE. It measures how consumers spend their money and whether they save rather than spend. It also shows how people change their buying habits when prices change.

Prices for services, however, continued to rise, with a gain of 0.3% from November to December, according to Friday’s data. She is betting that rate cuts likely won’t start until May, estimating the Federal Reserve will what is economic calendar make four cuts of a quarter of a percentage point each by the end of the year. Consumer spending rose by 0.7% in December, up from 0.4% in November. Adjusted for inflation, spending still increased by 0.5% last month.


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