Wall Street and the Federal Reserve will be laser-focused when the Commerce Department releases the August Personal Consumption Expenditures Price Index (CPE), the central bank’s preferred inflation gauge.
The Sept. 26 report lands just days after the Fed’s first interest-rate cut of 2025, a quarter-point trim to 4.00% to 4.25%, aimed at shoring up a weakening labor market.
Unlike the more familiar Consumer Price Index, PCE tracks a broader basket of spending from rent to healthcare, and it is directly tied to the Fed’s 2% inflation target.
The PCE is released by the Bureau of Economic Analysis (BEA), which is part of the U.S. Department of Commerce.
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Federal Reserve oversees inflation, jobs and interest rates
The Federal Reserve’s dual mandate from Congress requires price stability and low unemployment.
Here’s why:
- Lower interest rates lead to less unemployment but higher prices.
- Higher interest rates lead to lower inflation but higher unemployment.
The Fed cut the benchmark Federal Funds Rate by a quarter of a percentage point on Sept. 17 to 4.00% to 4.25%.
The first rate cut of the year was prompted by data showing a weakening in the labor market.
Fed Chair Jerome Powell has said there continues to be risks in both sides of the mandate with inflation and jobs.
One concern is the path of tariff inflation through the nation’s supply chain and if those price increases would be a one-time bump or linger into consumers’ wallets.
Why the Fed loves the CPE
The Federal Reserve relies on the CPE, not the Consumer Price Index (CPI), to set interest rates.
Here’s why that matters for investors, consumers and the next move in monetary policy.
- The PCE may not create as much buzz on Main Street as the CPI, but on Wall Street and inside the Federal Reserve, it’s the statistic that counts most.
- Published monthly by the Bureau of Economic Analysis, PCE measures the prices of goods and services that U.S. households consume.
- It covers everything from food to rent to healthcare, capturing a broader picture of the economy than CPI.
- The Fed has explicitly tied its 2% inflation target to PCE, making each release a key driver of interest rate expectations.
Fed targeted PCE in the early 2000s
The Fed’s preference for PCE dates back to the early 2000s, when then-Chair Alan Greenspan began emphasizing it over CPI.
Later, Ben Bernanke formalized the central bank’s inflation targeting strategy, aligning it with PCE.
Related: Fed chair cites dual risks over jobs, inflation as politics loom
Bernanke argued that PCE provided “a better sense of the underlying inflation trend.”
That preference has been tested in times of crisis. During the 2010s recovery from the Great Recession, CPI often overstated inflation compared with PCE.
Relying on PCE allowed the Fed to keep interest rates lower for longer, helping sustain the recovery without prematurely tightening.
In contrast, during the pandemic-era surge in prices, both PCE and CPI spiked but PCE’s broader coverage helped policymakers recognize how persistent services inflation had become, even as goods prices began to ease.
That shift influenced the Fed’s aggressive rate hikes in 2022–2023.
GDP on a fast track
The U.S. economy grew in the second quarter at the fastest pace in nearly two years as the government revised up its previous estimate of consumer spending.
Inflation-adjusted gross domestic product, which measures the value of goods and services produced in the U.S., increased at a revised 3.8% annualized pace, the BEA reported Sept. 25.
That was stronger than the previously reported 3.3% advance.
“The economy is clearly recovering from the shock of tariff implementation,” Chris Low, chief economist at FHN Financial, said in a note. “Accelerating growth should mean stronger job growth within the next few months.”
The revisions paint a picture of an economy that quickly rebounded from the initial shock of the pandemic and has since transitioned to a period of steadier, trend growth with lingering inflation, Bloomberg reported.
Related: BLS delays key consumer spending data as trust questions grow
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