What it means
PCE (Personal Consumption Expenditures price index) is the Fed's official inflation target gauge, released monthly by the Bureau of Economic Analysis. Differs from CPI in methodology and weights: PCE uses a wider basket of goods and services, updates basket weights more frequently (reflects substitution effects), and excludes shelter-via-owners-equivalent-rent in favor of actual market prices. The Fed targets 2% YoY on Core PCE (excluding food and energy) over the long run.
Why it matters
PCE is the Fed's reaction function anchor. Sustained Core PCE above 2.5% pressures hawkish policy; below 1.8% pressures dovish. The PCE release typically gets less immediate market reaction than CPI (released later, less surprise) but matters more for the Fed's actual decision at the next FOMC meeting.
How to use it
Track Core PCE YoY (the Fed's official measure). Compare to FOMC's stated 2% target. Watch for divergence between CPI and PCE — when they diverge meaningfully (>0.3% in core measure), the divergence itself is informative about composition of inflation. PCE is released ~2 weeks after the corresponding CPI for the same month.
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