U.S. Inflation: Services Lead Since Mid-2023

Year-over-Year Personal Consumption Expenditures (PCE) Price Index Inflation by Goods and Services Mix

The Personal Consumption Expenditures (PCE) price index (PCEPI) serves as a key measure of inflation within the US economy. It assesses the prices paid by individuals residing in the United States, or those purchasing goods and services on their behalf. Widely recognized for its ability to capture inflationary or deflationary trends across a broad spectrum of consumer expenses, the PCEPI reflects shifts in consumer behavior.

The PCEPI evaluates inflationary pressures by analyzing changes in the cost of living for households. It does so by monitoring the prices of a diverse array of goods and services, each weighted differently to represent typical monthly expenditures by households. Although akin to the Bureau of Labor Statistics' Consumer Price Index (CPI), the PCEPI differs in both formulation and application.

In 2012, the PCE Price Index assumed primacy as the Federal Reserve's preferred inflation gauge for informing monetary policy decisions. The Fed favors the PCEPI over the CPI due to its superior reflection of changes in consumer spending habits, including adjustments made in response to price fluctuations. Moreover, the PCEPI encompasses a broader spectrum of spending categories.

Notably, the PCEPI derives its weighting from data obtained through business surveys, which are generally deemed more reliable than the consumer surveys employed by the CPI. Furthermore, the PCEPI utilizes a formula designed to accommodate shifts in consumer behavior and short-term fluctuations.

According to the Bureau of Economic Analysis (BEA), inflation in the PCE price index for goods outpaced that of services from April 2021 to November 2022, emerging as the primary driver of PCEPI inflation in the United States. However, services took the lead in driving PCEPI inflation starting in 2023. As of January 2024, year-over-year PCEPI inflation for goods had declined to -0.5%, while that for services reached 3.9%.