What is the PCE adjustment index? The significance of PCE index, the importance of PCE to the crypto market

Table of contents

• What is PCE adjustment index?
• What is core PCE?
• Why is PCE adjustment index important?
• How does PCE adjustment index work?
• PCE Adjustment Index and CPI
• Limitations of PCE adjustment index
• What is the difference between PCE index and CPI index?
• The role of PCE adjustment index in the crypto market
• How to track PCE adjustment index
• in conclusion

Understanding PCE and its adjusting index is crucial for policy makers, economists, and crypto investors and airdrop players who are concerned about inflation. The PCE adjustment index, that is, the chain-weighted personal consumption expenditure price index, is the Fed's most favored inflation measurement tool. Written by the Gate content team, this article will provide an in-depth analysis of the definition, operating mechanism, comparison with CPI, its limitations, and why PCE data has an important impact on the encryption market.

What is PCE adjustment index?

The PCE adjustment index is used to measure the price changes of the goods and services consumed by residents over a certain period of time. Its uniqueness is that the composition and weight of the commodity basket will be dynamically adjusted according to actual consumption behavior. Unlike the index with fixed weights, this chain approach can reflect the "substitution effect" - that is, when a certain commodity price rises, consumers may turn to cheaper alternatives. Therefore, it can reflect the actual pressure of inflation more realistically and flexibly.

At Gate, when we evaluate the impact of macroeconomic factors on crypto asset valuation and airdrop strategies, we focus on PCE adjustment index, because rising prices often prompt investors to allocate funds to cryptocurrencies and anti-inflation assets.

What is core PCE?

Although the Fed is focusing on the PCE index, to be more precise, its core focus is the "Core PCE Price Index". Core PCE is an indicator after removing food and energy projects with severe price fluctuations based on the overall PCE. Therefore, the fluctuation range of core PCE is usually smaller than that of overall PCE, which can better reflect the long-term inflation trend.

Why is PCE adjustment index important?

The reason why PCE adjusts the index is key is that it directly affects the direction of US monetary policy. The Fed sets its long-term target for core PCE annual rates at 2%, believing that this will help achieve stable growth without triggering hyperinflation. Based on PCE data, the Federal Reserve decided to raise interest rates or cut interest rates to regulate the popularity of the economy.

For crypto users who trade on Gate, mastering PCE trends can help predict market sentiment and capital flows. If PCE data exceeds expectations, it may indicate tightening policies and lead to tightening liquidity in the crypto market; conversely, if inflation is moderate, it may enhance risk appetite, promote capital flow into the crypto field, and increase the popularity of airdrop participation.

How does PCE adjustment index work?

The calculation process of PCE adjustment index is as follows:

• Determine the base period : Select a reference year as the benchmark.
• Track consumption data : Use national income accounts to collect the actual expenditure amount of various goods and services.
• Chain weighting : Using a chain formula, the weights of each project are constantly updated based on the latest consumption data to reflect changes in the consumption structure (for example, from cinemas to streaming).
• Calculate the price ratio : Compare the current price to the previous price and obtain the relative prices of each item.
• Weighted summary : Multiply the price ratio by the latest expenditure weight and add it to form the overall PCE index.
• Obtain the inflation rate : By calculating the index's 12-month change rate, the annual inflation level is derived.

This mechanism allows PCE to dynamically adapt to the evolution of consumption habits and provide a more realistic inflation picture.

PCE Adjustment Index and CPI

Although both PCE and CPI are used to measure inflation, there are obvious differences between the two:

• Weighting method : PCE uses chain weighting, and the weights are continuously updated; CPI uses a fixed weight Rather's formula, which may lag behind consumption changes.
• Coverage : PCE covers all personal consumption expenditures, including medical insurance and government medical expenses paid by employers; CPI only counts the out-of-pocket part of the household.
• Application scenarios : The Federal Reserve uses PCE as its main basis for its decision-making due to its wide coverage and high flexibility; CPI is mostly used for living cost calculations such as wage adjustment and social security linkage.

These differences make PCE generally more stable than CPI and better represent the overall inflation trend.

Limitations of PCE adjustment index

Although PCE has obvious advantages, there are also shortcomings:

• High complexity : Chain calculations and frequent weight adjustments make their model complex, making it difficult for the public to understand.
• Lag in release : PCE relies on comprehensive national account data, usually released one month later than CPI.
• Coverage blind spots : Although it is wide-ranging, it may not be as meticulous as CPI when it comes to measuring housing costs (such as owner equivalent rent).

The Gate research team will simultaneously analyze PCE and CPI data to provide crypto investors with concise interpretations and help grasp the inflation trends behind them.

What is the difference between PCE index and CPI index?

To help readers clearly distinguish PCE from CPI, the following table summarizes the main differences between the two:

1. Expenditure scope : PCE includes all consumer expenses, such as medical expenses paid by employers and governments; CPI only counts the part paid directly by individuals, resulting in different weights on medical and other projects.

2. Preparation method : PCE uses Fisher Index, CPI uses Larros Index.

3. Source of data : PCE is based on business surveys, such as retail and service industry reports; CPI relies on household questionnaires.

4. Weight structure : PCE is divided into six categories, with relatively balanced weight distribution and is not easily affected by fluctuations in a single project; housing accounts for nearly 40% of CPI, which is easily dominated by rent changes.

The following is the weight distribution of the current six categories of PCE index:

Information time: 2022/07/19

The role of PCE adjustment index in the crypto market

Inflation data such as PCE adjustment index have a significant impact on the crypto market:

• Anti-inflation demand : When PCE shows inflation rising, investors may regard cryptocurrencies as “digital gold” to preserve value.
• Interest rate expectations : Strong core PCEs may trigger expectations of interest rate hikes, affecting market liquidity, and thus affecting risk appetite for crypto assets.
• Airdrop Strategy : Some projects may take airdrop snapshots before and after PCE releases to take advantage of opportunities for market activity and trading volume increase.
• Market sentiment : Encrypted prices often react to PCE data, and volatility provides traders with opportunities to arbitrage and earnings farming.

By integrating PCE trend analysis, Gate users can more effectively deal with market fluctuations caused by macro changes.

How to track PCE adjustment index

The following channels can help you obtain PCE data in a timely manner:

• Bureau of Economic Analysis (BEA) : Releases an official PCE report, including detailed data and method descriptions.
• Federal Reserve Economic Data (FRED) : Provides visual charts of core and overall PCE.
• Financial News Platform : Interpret monthly PCE releases and provide expert opinions.
• Gate Academy : Provides a popular guide to interpreting PCE data and its impact on the crypto market.

Gate Education Center will push instant interpretations when PCE is released to help

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