The Personal Consumption Expenditures (PCE) price index measures the prices that consumers in the United States pay for a variety of goods and services. This index is created by the Bureau of Economic Analysis (BEA), which operates under the U.S. Department of Commerce. The BEA is tasked with producing essential economic statistics that assist government officials, businesses, and the public in understanding the current economic situation in the U.S.

The PCE price index is recognized for capturing price changes across a wide range of consumer goods and services, reflecting alterations in consumer behavior. For example, if the prices of butter and eggs increase, consumers may choose to buy less of these products.

The Core Personal Consumption Expenditure (PCE) price index tracks price changes for goods and services that consumers purchase for personal use, excluding food and energy expenses.

The PCE price index acts as an indicator of inflation in the U.S., monitoring price changes for goods and services acquired by consumers. It is comparable to the Consumer Price Index (CPI) produced by the Bureau of Labor Statistics, but the two indices are calculated differently and serve different purposes, resulting in discrepancies in their inflation rates. The Federal Reserve favors the PCE price index as a measure of inflation.

In the U.S., there are two primary measures of inflation: the Personal Consumption Expenditures Index (PCE) from the BEA and the Consumer Price Index (CPI) from the BLS. The presence of both is due to their differences:

1. Comprehensiveness: The CPI only accounts for out-of-pocket expenses for goods and services, omitting costs not directly paid for, such as medical care covered by employer insurance, Medicaid, or Medicare. The PCE includes all these expenses.
2. Formula: The PCE is less volatile than the CPI because its calculation method smooths out price fluctuations. Prices that undergo significant changes, like airfare and fuel, have a more substantial effect on the CPI.
3. Data Sources: The PCE obtains its data from the GDP report and suppliers, while the CPI is based on household surveys. The PCE also considers spending by all U.S. households and nonprofits, whereas the CPI focuses exclusively on urban households.

The PCE is preferred by the Federal Reserve as it encompasses a broader range of goods and services and adjusts to changes in consumer preferences. For instance, if milk prices rise and consumers purchase less milk, the PCE modifies its basket of goods accordingly. In contrast, the CPI is less responsive to changes in consumer behavior.

Moreover, PCE data can be revised more frequently than CPI data, which is only adjusted for seasonal factors and for the previous five years. In summary, the PCE captures a wider array of goods and services from a larger demographic, aiming to reflect actual purchasing behavior and how it evolves with price changes, resulting in more stable price variations in the PCE.