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US PCE Preview: Three ways this inflation measure impacts your income and summer plans

  • The US Personal Consumption Expenditure figure is a better measure of real-time inflation. 
  • Federal Reserve officials examine this report to make mortgage-impacting interest rate decisions.
  • The US Dollar responds to this publication, influencing prices of imported goods and vacations.
  • PCE data for May is set to show inflation remains stubbornly high. 

Isn't inflation data already out? Think again – the Consumer Price Index (CPI) is the report getting all the attention, but the less-known Personal Consumption Expenditure (PCE) Price Index is no less important and for three reasons.

Here is why you should watch the PCE release and what to expect from the upcoming publication on Friday at 12:30 GMT. 

1) Why PCE inflation is more meaningful for your pocket

Inflation is the change in prices of products and services people consume, where every item has a different weight according to the amount bought by Americans. Rent has a greater weight than a hotel stay, and a car has larger weight than furniture. 

Both the CPI and the PCE inflation indexes are based on such calculations. Still, the difference is in the frequency they are updated – economists responsible for the PCE update it more frequently, according to how people change their consumption patterns. 

For example, if the price of tomatoes leaps and people buy more cucumbers, the CPI will increase vegetable prices as driven by soaring tomato prices without considering that less tomatoes are being bought. However, the PCE will adapt to modified consumption patterns, giving cucumbers more weight and tomatoes a minor impact on vegetable prices.

In the example above, PCE inflation would be lower than the CPI one, but this is not always true. Beyoncé is on tour, and fans cannot get enough of her shows – prices are rising and the PCE has adjusted in real-time to reflect higher ticket prices. In Sweden, her shows triggered a leap in hotel and restaurant prices, and some analysts say that this contributed to raising national inflation. 

The PCE is off the peak, but it advanced from 4.2% to 4.4% in April, contrary to CPI, which fell that month:

Source: FXStreet

PCE is expected at 4.6% in May, still too high, but more up-to-date than CPI. All in all, the former better reflects prices in real-time, so it is worth watching it more closely. 

2) Federal Reserve officials watch Core PCE and that impacts mortgage and other lending rates

You borrow money from your bank, and your bank's interest rates depend on the central bank, the Federal Reserve. If you want to buy a house or take out a loan to buy a new car, the Fed is worth watching – and it watches PCE inflation.

More importantly, officials in Washington eye Core PCE. What is the difference? Economists separate between overall price changes, and those that are less volatile – excluding energy and food prices. While you need food to move on and your car needs gas to do the same, these are prices the Fed tends to look through when deciding on interest rates.

Oil prices are set in international markets – impacted by output cuts in Saudi Arabia, Chinese consumption and not only US production and consumption. Food prices are also set globally, influenced by falling Ukrainian supply, droughts in faraway countries and how people consume it all over. 

Through interest rates, the Fed impacts the prices of everything else. If borrowing costs are high, people tend to save more and take out fewer loans, pushing demand and prices down. If rates fall, there is more money running around, boosting inflation. 

So, this chart of Core PCE matters to the Fed:

Source: FXStreet

Core PCE stood at 4.7% in April, and a repeat of this level is expected in the upcoming release for May. If it beats expectations, mortgage rates may rise. Likewise, lending costs could drop if it falls short of projections.

3) PCE inflation impacts the US Dollar via Fed decisions

The Federal Reserve watches PCE – so financial markets also examine it closely. The higher it goes, the greater the chance for further rate hikes and thus a stronger US Dollar. The Greenback would lose value against its peers on a lower read.

Why does the value of the currency matter? If you buy goods made abroad, a stronger US Dollar makes them cheaper. It also makes your potential trip to Europe or other places a better bargain. If inflation falls, it may be good for day-to-day costs, but any such vacation or purchase of foreign-made products becomes more expensive. 

That is another reason to follow this publication, especially if you are on the verge of using your dollars outside the US. 

May's report is set to show inflation is stubbornly high

Looking at the economic calendar, inflation as measured by the Core PCE is expected to remain at 4.7% YoY, or rise by 0.4% – too fast – monthly. That means your dollars are still losing value at a frustrating pace, but if you go for a summer vacation abroad, you're in for a better bargain. 

If the outcome is weaker, it would show that price rises are slowing, and your money goes further. A leap in PCE inflation would show the opposite – that real costs are re-accelerating. 

Conclusion

Consumers tend to overlook PCE inflation – but there are good reasons that justify examining it closely. It is a better measure of price rises and has a stronger impact on the Fed, which influences interest rates and the US Dollar’s exchange rate. 

The upcoming release is set to show inflation is still sticky – not going down fast enough. 

United States Personal Consumption Expenditures - Price Index (MoM)

The Personal Spending released by the Bureau of Economic Analysis, Department of Commerce is an indicator that measures the total expenditure by individuals. The level of spending can be used as an indicator of consumer optimism. It is also considered as a measure of economic growth: While the Personal spending stimulates inflationary pressures, it could lead to rise interest rates. A high reading is positive (or Bullish) for the USD. Read more.

Next release: Friday June 30, 2023 12:30:00 GMT
Frequency: Monthly
Source: US Bureau of Economic Analysis

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

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