The US Department of Statistics and Economic Analysis determines the degree of influence of inflation on personal spending of households, using the formula of the index of expenditures on the spectrum of a certain consumer set, which does not include part of the costs. The formula "lowers" the cost of electricity and daily food, allowing you to reduce the volatility of the results.
Thus, the value of the Core PCE Price Index" correctly " determines the impact of inflation, since service providers and retailers invest a premium of pre-inflationary expectations in prices. Traditionally, this parameter was measured by the consumer price index (CPI), but in 2000 the Fed switched to PCE.
The algorithms for calculating both indicators coincide in a set of parameters that include personal costs for:
- Rental or utility costs
- Eating out
- Medicine, insurance, transport
- Expenses for children's education and their own education
- Holidays and any expenses abroad
The index is a weighted average of prices obtained by adding costs according to the Fisher formula, which allows you to take into account the rate of inflation. Each item of personal expenses is provided with a coefficient, calculations take into account seasonal adjustments and values without taking into account inflation-PPE deflator.
The calculated value is compared with the base of 2009, equated to 100 and converted into relative units.
Frequency, time and format of publication of Core PCE Price Index
The PCE index indicators are published monthly, as a percentage change from previous forecasts. The data is released before the opening of the US markets, at 15: 30 Moscow time, every last working day of the month.
In the economic calendar impact the indicator on the markets is defined as an average of two points on a three-point scale.
Before the news is released, traders have access to the forecast and previous value of the PCE Index, and the indicator comes out in the form of percentage changes.
The impact of the index on the foreign exchange and stock market
The index of the volume of personal consumption of households is one of the parameters taken into account by the Fed when making decisions on the main directions of monetary policy.
If the released data turned out to be better than the forecast — the dollar exchange rate is strengthening against others currencies, and the numbers below the forecast cause weakening.
Investors are also watching the weighted average dynamics of spending, which essentially indicates annual inflation, which helps to forecast the Fed's monetary policy in relation to rates. Exceeding the annual values of the current the discount rate guarantees its growth in the future, the strengthening of the national currency.
The US dollar accounts for 75% of the trading volume Forex, also the rates of energy carriers and metals are denominated in this currency. The average annual change in the PCE Price Index, coinciding with the next meeting of the Fed, at which a high probability of raising the rate is predicted, will cause a jump in volatility for all world currencies and metals.
Stock indexes win back the output of these news with a delay due to their release before the opening of the exchanges, which can provoke price gaps and high volatility of the first minutes of trading. An increase in consumer spending causes purchases of stocks, but PCE values exceeding the rate can cause a fall, as the tightening of the Fed's credit policy reduces the inflow of funds to stock markets.