PCE Index (Personal Consumption Expenditures Price Index)

The Personal Consumption Expenditures Price Index (PCE) measures the average change in prices for all domestic personal consumption. There is also core PCE which excludes high volatility items, such as food or energy. It is a part of the Personal Income and Outlays Report issued monthly by the Bureau of Labor Statistics and it is derived from personal consumption expenditures. The index is similar in many respects to the CPI, but there are some important differences. In particular, they are calculated by distinct formulas, they assign different weights to particular goods and services, and they have various scopes.

The differences between these two indexes prompted the Fed to switch from the CPI to the PCEPI in 2000. In that year, the Federal Open Market Committee stopped publishing CPI forecasts and began making its inflation projections based on the PCE. Why is the latter the Fed’s favorite index? The main reason is that the PCE changes the weights in the consumer basket every month, i.e. much more often than the CPI does. Moreover, the PCE Index has a broader scope and its weights are based on (allegedly) more comprehensive measures, and it assigns much less weight to rent and housing and much more to health care. Although the PCE Index is the Fed’s preferred measure of inflation, it is released after the CPI, hence its release provokes a weaker reaction in the gold market.

PCE and Gold

How do the gold, PCE and its core version correlate? Let’s analyze the chart below.

Chart 1: The Personal Consumption Expenditures Price Index (green line, left axis), the core Personal Consumption Expenditures Price Index (red line, left axis) and the price of gold (yellow line, right axis, London P.M. fix) from 1971 to 2015.

Gold & PCE index

As one can see, there is a similar relationship as with the CPI. The shiny metal is not an effective inflation hedge when inflation is measured by the PCE or its core version for short- and medium-term horizons. The price of gold was declining in the 1980s and the 1990s, but the inflation rate at the time was positive. However, there is a relationship between the price of gold and the acceleration and deceleration of the inflation rate. Indeed, gold prices were increasing in the 70s, when the inflation rate was high and accelerating. Respectively, they were declining in the 80s and the 90s when the inflation rate was declining. The very same link to gold should not come as a surprise if we realize that the PCE shows very similar dynamics to the CPI (see the chart below).

Chart 2: The Personal Consumer Expenditures Price Index (red line) and the Consumer Price Index (green line) from 1960 to 2015 (as a percent change from year ago).

PCE Index, CPI, Gold

We encourage you to learn more about gold – not only how it is affected by the PCEPI, but also how to successfully use gold as an investment and how to profitably trade it.