PCE data explained thoroughly: Why does the Fed value it so much?

Let's speak human language

The PCE index measures the speed and scale at which American citizens spend money. Simply put: when people spend more on food, housing, and healthcare, the PCE goes up; conversely, it goes down.

Why is this data so important? Because personal consumption accounts for more than 60% of the U.S. GDP. In other words, whether the U.S. economy can run steadily mainly depends on whether ordinary people are willing to spend money.

The Federal Reserve uses PCE to assess the level of inflation, and thus decides whether to raise or lower interest rates. Therefore, when PCE data is released, it often triggers significant market fluctuations.

How is PCE calculated?

The process is simple: collect prices → assign weights → compare with the benchmark period → weighted average

The U.S. statistical agency will monitor the price changes of various goods and services, including food, clothing, housing, transportation, and healthcare. Based on the proportion of actual consumer spending, weights are assigned to each good/service (for example, housing has a high weight because it is a major expense). Then, by comparing the current prices to the base period prices, one can see how much they have increased. Finally, a weighted sum is calculated to derive the PCE index.

5 Major Factors Directly Affecting PCE

1. Inflation Spiral Oil prices rise → Transportation costs increase → Food prices follow suit → PCE passively rises. The same goes for skyrocketing housing prices, with mortgage/rental costs soaring, directly driving up PCE.

2. Employment Data
Low unemployment rate = a full wallet. During the great expansion of the technology industry, employment rates soared, people's incomes increased, and they were willing to spend money, leading to a rise in PCE.

3. Salary Increase
Wage increases for workers → Enhanced purchasing power → Increase in the number of people buying houses, cars, and consumer goods → PCE rises.

4. Interest Rate Level When interest rates are low, borrowing is cheaper, and people are more willing to borrow money for consumption. With a decrease in mortgage rates, more homebuyers emerge, leading to an active real estate market, which pushes up the PCE. Conversely, the opposite is also true.

5. Consumer Confidence This is the softest indicator, but the most powerful. When people are optimistic about the economic outlook, they actively consume; when the economic outlook is unclear, people become hesitant. Once confidence shifts, the PCE may quickly reverse.

Insights for Traders

PCE release dates are generally at the end or the beginning of the month (a day with dense release of U.S. economic data), on this day, the cryptocurrency market, stock market, and foreign exchange market will all react.

• PCE significantly higher than expected → Inflationary pressures confirmed → The Federal Reserve tends to continue anti-inflation measures (interest rate hikes/maintaining high rates) → Risk assets (cryptocurrencies, tech stocks) are usually sold off.
• PCE lower than expected → Inflation relief signal → Rate cut expectations rise → Risk assets have a chance to rebound

In simple terms: PCE determines the temperament of the Federal Reserve, and the temperament of the Federal Reserve determines the price of your assets. Monitoring PCE data is like having the key to understand market sentiment in advance.