Core PCE inflation

Core PCE inflation refers to the Core Personal Consumption Expenditures Price Index, which measures the change in prices of consumer goods and services—excluding food and energy—purchased by individuals in the U.S. It is published monthly by the Bureau of Economic Analysis (BEA) and is considered the Federal Reserve’s preferred inflation gauge for monetary policy decisions.

Food and energy prices are volatile and can fluctuate sharply due to factors like weather events, geopolitical tensions, or oil supply disruptions. By removing these items, Core PCE provides a clearer view of underlying, long-term inflation trends, which helps the Fed assess whether inflation is broad-based or driven by temporary shocks.

The Federal Reserve closely watches Core PCE inflation to determine whether it needs to raise or lower interest rates. The Fed’s long-term inflation target is 2%, based on this index. If Core PCE inflation rises significantly above this level, it may signal overheating and prompt rate hikes. If it falls below, it may suggest weak demand and support for rate cuts or continued stimulus.

Key Features:

Covers a broader range of expenditures than the Consumer Price Index (CPI)
Adjusts for changes in consumer behavior (like substituting cheaper goods)
Viewed as a more stable and accurate reflection of inflation trends over time

In short, Core PCE inflation is a vital tool for understanding price stability and guiding U.S. economic policy.

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