Yahoo Finance’s Josh Schafer joins the Live show to break down what PCE means and why it matters.

Video Transcript

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- The Fed's favorite inflation gauge showed inflation is not moderating. Core PCE, excluding food and energy, rose 3/10 of a percent in March from February, in line with estimates and unchanged from the prior month. But what does it actually mean? And why does it matter? Yahoo Finance's Josh Schafer is here to explain. Josh?

JOSH SCHAFER: The Personal Consumption Expenditures Index, also known as PCE, is the Fed's preferred method for measuring inflation. But what does PCE actually mean? It's an index measured by the Bureau of Economic Analysis, also known as the BEA. It tracks the consumer side of prices for goods and services by measuring changes in the cost of living for households.

It follows the prices of a basket of goods and services. And each item in this basket carries a different weight. For example, if the price of gas rises, that has a bigger impact on PCE than the price of tomatoes because it represents a larger portion of consumer spending. This basket of items changes every month, all based on consumer trends, unlike CPI, which changes every two years. The data comes from surveys of businesses rather than what consumers say they're spending on goods and services.

In the PCE index, the BEA separates consumer goods and consumer services into three categories. There's durable goods, items that last three years or longer, like cars and trucks; nondurable goods, items that lasts less than three years; and then there's services, things like housing, health care, and transportation.

But why is it all matter? It's all about the Fed. Both PCE and CPI help policymakers understand the health of the economy. The Fed prefers PCE because it changes its basket more often, which provides a more accurate reading of consumer trends. When the data continues to come in high, the Fed interprets that there is upward pricing pressure in the economy, which often impacts their policy decisions.

- Yeah, it all comes back to the policy decisions of the Fed when we're talking about PCE here. And there's nothing really in this report today that gives them cover to pause in their meeting. They're meeting next week, May 3, right? And there's not meaningful slowing.

JOSH SCHAFER: And we've been talking a lot about the fact that inflation has been-- a lot of different words out there. But, basically, it won't go away, right? It keeps staying up there and it keeps staying.

And when you look at that graph that we've showed with that PCE graph, specifically the core PCE graph, it's really almost gone flat in some ways. And that is not what the Fed is looking for. We know they want to get that eventually down to 2%. Right now, we're not really even close to that 2% mark, guys.