In July, the PCE price index rose 0.2%, excluding food and energy, recording a similar increase. The real PCI increased by 0.1%, while real PCE increased by 0.4%, with a 0.7% increase in spending on goods and 0.2% on services.
Personal income increased by $75.1 billion, up 0.3% month-on-month, according to estimates from the U.S. Bureau of Economic Analysis. Personal disposable income, which represents income after tax, increased by $54.8 billion (0.3%), while personal consumption expenditure increased by $103.8 billion (0.5).%
The main reason for the increase in personal income in July was an increase in compensation. The increase in personal consumption expenditure in July, which amounted to $103.8 billion, also reflects an increase of $59.3 billion in spending on services and $44.5 billion on goods. In services, housing and utilities, especially housing, were the main driver of the increase, while in goods, motor vehicles and spare parts, as well as food and beverages, were the largest contributor.
Personal expenditure, which includes the sum of personal consumer spending, interest payments and personal transfer payments, increased by $103.3 billion in July, with personal savings reaching $598.8 billion, with a personal savings rate of 2.9 billion.%.
In terms of prices, the PCE price index increased by 0.2% compared to the previous month, with a slight increase in the prices of goods and services. Over the year, the PCE price index increased by 2.5%, with food and energy prices increasing by 1.4% and 1.9% respectively.
The 0.4% increase in real personal consumption expenditure in July was due to a 0.7% increase in spending on goods and services by 0.2%. In the field of goods, motor vehicles and spare parts were the main driver, while health care was in the field of services.
Basic PCE Price Index: Significance and Interpretation
The US Dollar Basic Personal Consumption Expenditure Price Index (month-to-month PCE Price Index) is a leading economic indicator issued by the Bureau of Economic Analysis (BEA) in the United States. Here are some important points about this indicator:
Definition: The Basic Personal Consumption Expenditure Price Index measures changes in the prices of goods and services purchased by consumers, excluding volatile food and energy prices. The “core” index is a more stable measure of inflation trends because it excludes these volatile components.
Important: The core PCE price index is the Fed’s preferred inflation measure and is closely monitored by policymakers, economists, and investors. It provides insights into underlying inflation trends and helps assess consumers’ purchasing power.
Main Index: Inflation is a critical economic factor because it affects interest rates, investment decisions, and consumer spending. The core PCE price index helps measure whether and at what rate prices are rising or falling, influencing monetary policy decisions.
Explanation: A higher-than-expected increase in the core PCE price index on a monthly basis indicates inflationary pressures in the economy. On the other hand, a lower-than-expected reading indicates muted inflation. The Fed often targets an inflation target of around 2%.
Market Impact: Changes in the underlying PCE index can affect financial markets. Higher inflation may lead to expectations of monetary tightening policy, which could lead to higher interest rates and a stronger US dollar. On the other hand, lower inflation may have the opposite effect.
Policy implications: The Fed uses inflation indicators such as the core PCE price index to guide monetary policy decisions. Persistent deviations from the Fed’s inflation target can affect interest rate decisions, asset purchases, and other policy tools.
The difference between the personal and basic consumption expenditure index and the impact of each
The PCE price index and the core PCE price index are both measures of inflation, but they differ in terms of the range of goods and services they cover and their specific uses. The differences are broken down below:
1. Inclusion of food and energy:
- Personal consumption expenditure price index: This is the broadest measure that includes all goods and services consumed by households, including food and energy prices.
- Basic PCE Price Index: This measure excludes food and energy prices due to their volatility. The elimination aims to provide a clearer view of persistent underlying inflation trends.
2. Use by the Federal Reserve:
- Personal consumption expenditure price index: While the PCE index provides a comprehensive view of inflation, the Fed does not usually refer to it in determining monetary policy because it includes volatile food and energy prices that can obscure underlying inflation trends.
- Core PCE Price Index: The Fed favors the core PCE index as the primary measure of inflation for monetary policy decisions. It focuses on the core metric because it provides a more stable and consistent picture of inflation and is better aligned with the Fed’s price stability targets.
3. Purpose:
- Personal Consumer Price Index: Provides a broad-based measure of inflation that includes all categories of consumer spending and is useful for a general understanding of inflationary pressures in the economy.
- Core Personal Consumer Price Index: focuses on long-term inflation trends by filtering out the most volatile components, making it more relevant to policy decisions and long-term economic forecasting.
4. Market Impact:
- Personal consumption expenditure price index: Despite its importance, the PCE index is often seen in conjunction with the baseline measure.
