The personal consumption expenditures (PCE) price index is a key measure of U.S. inflation, tracking changes in the prices consumers pay for goods and services. PCE itself measures consumer spending, which accounts for roughly two-thirds of domestic spending and is a major driver of gross domestic product (GDP). The Bureau of Economic Analysis (BEA) tracks changes in this spending each month, alongside the PCE price index.

Released monthly by the Bureau of Economic Analysis (BEA), the PCE price index is particularly important to investors because it is the Federal Reserve's preferred inflation gauge.

Headline vs. Core PCE

Headline PCE measures price changes across all goods and services, including food and energy. Core PCE excludes food and energy prices, which tend to be more volatile, and can therefore provide a clearer look at underlying inflation trends.

The Federal Reserve's long-term inflation goal is 2%, as measured by the annual change in the PCE price index. As a result, PCE data can play an important role in the central bank's interest rate decisions.

PCE vs. CPI

PCE and the consumer price index (CPI) both measure inflation, but there are important differences. PCE covers a broader range of consumer spending and better accounts for changes in purchasing behavior when consumers substitute one product for another. CPI, meanwhile, focuses more heavily on consumers' direct out-of-pocket expenses.

Why PCE Matters to Investors

PCE data can influence expectations for Federal Reserve policy and, in turn, move stocks and bonds. A hotter-than-expected reading may fuel expectations that interest rates will remain higher for longer, while cooler inflation can bolster the case for rate cuts.

Investors should also pay attention to how PCE compares with economists' expectations. A surprise in either direction can quickly shift the outlook for interest rates, making the monthly PCE report a potentially important market-moving event.