In-Depth Analysis of the US PCE Price Index: Its Actual Impact on Taiwan's Financial Market

Core Definition of the PCE Price Index

PCE Price Index (Personal Consumption Expenditures Price Index) is a key economic indicator that measures the trend of changes in personal consumption expenditures. It reflects consumers’ actual spending on goods and services and serves as an important window into the domestic demand strength of a country’s economy.

The significance of this index lies in the fact that personal consumption expenditures typically account for over 50% of a country’s GDP. Through the PCE Price Index, policymakers and investors can accurately gauge the temperature of economic activity, assess the true level of inflationary pressures, and formulate appropriate monetary policies and investment strategies.

The Federal Reserve System in the United States pays close attention to PCE data, considering it an important reference for setting interest rates. Compared to the Consumer Price Index (CPI), the PCE Price Index covers a broader scope and is calculated with greater precision.

Calculation Logic of the PCE Price Index

The compilation of the PCE Price Index follows strict statistical methods. First, statisticians collect price data for various goods and services such as food, clothing, housing, transportation, and healthcare. Next, weights are assigned based on the actual expenditure proportions of these goods and services in personal consumption.

Subsequently, by comparing weighted prices between the base period and the current period, the overall price change rate is calculated. This process ensures that the PCE Index accurately reflects the actual price changes faced by consumers, rather than a simple arithmetic average.

The final PCE Price Index data not only serves economic policy formulation but is also widely used to assess economic health and forecast future consumption trends.

Taiwan Market Sensitivity to U.S. PCE Fluctuations

Taiwan, as one of the most open economies globally, is highly synchronized with the U.S. economic cycle. Fluctuations in the U.S. PCE Price Index impact Taiwan across multiple dimensions:

Exchange Rate Fluctuations: When the PCE index rises, the U.S. economy is considered to remain strong, and the dollar usually appreciates. An appreciating dollar directly pushes up the USD/TWD exchange rate, affecting Taiwan’s export competitiveness. Export-oriented manufacturing industries in Taiwan face increased international competition pressure.

Export Demand: Taiwan’s exports to the U.S. account for over 15% of total exports. When the U.S. PCE index rises, it indicates increased consumer spending in the U.S., leading to higher demand for Taiwanese goods. Conversely, a decline in the PCE index may result in reduced export orders for Taiwan.

Stock Market Performance: Positive signals from the U.S. economy attract international capital inflows, benefiting Taiwan’s stock market, which is an important financial market in Asia, amid rising global risk appetite.

Energy Costs: An increase in the PCE index may accompany rising global energy demand, leading to higher international oil and gas prices, which in turn raises Taiwan’s energy import costs, affecting production costs and local inflation rates.

U.S. PCE Release Timing and Market Reactions

The U.S. PCE Price Index is usually released on the last business day of each month or on a nearby business day, at 8:30 PM Eastern Time. This moment often becomes the focus of global financial markets, with data exceeding or falling short of expectations potentially triggering significant market volatility.

For example, in October 2023, the U.S. reported a 0.7% increase in consumer spending for September, surpassing market expectations. This robust spending data reflects sustained household purchasing power and strong demand for automobiles, travel, and other consumer goods. Meanwhile, the core PCE Price Index increased by 0.3% month-over-month and 3.7% year-over-year, indicating rising costs in the service sector driving inflation.

It is also noteworthy that the personal savings rate dropped from over 5% previously to 3.4%, indicating consumers have begun to utilize accumulated excess savings to support spending. Economists generally believe that as pandemic-era savings are gradually depleted, consumer spending growth may slow in early 2024.

Main Factors Affecting the PCE Price Index

Inflation Rate: Inflation directly pushes up the prices of goods and services, weakening consumers’ purchasing power. When oil prices rise, transportation costs increase, eventually passing through to food, daily necessities, and other end products, thereby raising the PCE index.

Labor Market Conditions: High employment rates and wage growth increase consumers’ disposable income, encouraging more spending. When key industries like technology and manufacturing expand hiring, wage levels rise, leading to increased demand.

Interest Rate Levels: In a low-interest-rate environment, borrowing costs decrease, making consumers more willing to make large purchases through loans (such as buying a house or car), pushing the PCE index higher. Conversely, high interest rates can suppress credit demand and consumer enthusiasm.

Consumer Confidence Index: When economic outlooks are optimistic, consumers are more willing to spend; when economic uncertainty increases, consumers tend to be conservative, causing the PCE index to decline.

Historical Data and Economic Cycles

The PCE Price Index is the Federal Reserve’s most core indicator for monitoring inflation. Historical data shows that PCE movements are closely related to economic cycles.

After the 2009 financial crisis, the U.S. economy entered recovery. The PCE Price Index gradually increased from near-zero growth to about 2% in 2018, reflecting a gradual restoration of consumer confidence and sustained purchasing power. During the same period, the S&P 500 index also showed a similar recovery and upward trend, indicating a positive correlation between the PCE index and stock market performance.

During the COVID-19 pandemic outbreak in 2020, the PCE Price Index plummeted rapidly, with annualized changes approaching -1% in April, deeply reflecting the immediate impact of the pandemic on consumer behavior. This affected stocks in traditional sectors like travel and retail, while e-commerce and healthcare sectors surged against the trend.

Recently, the PCE Price Index has fluctuated between 4.6% and 5.2%, with forecasted and actual values showing little difference, indicating that market expectations for consumer spending are relatively accurate and that consumer behavior and market trends are relatively stable.

Chain Reactions of U.S. PCE Fluctuations Globally

As the world’s largest economy, the U.S. PCE Price Index fluctuations have ripple effects worldwide. When U.S. PCE exceeds expectations, the Federal Reserve may continue to raise interest rates to curb inflation, leading to a stronger dollar, which increases the cost of dollar-denominated commodities and pressures export-oriented economies. Conversely, if the PCE falls below expectations, the Fed may pause or cut rates, weakening the dollar, prompting international investors holding dollar assets to adjust strategies.

The impact of the PCE Price Index on the domestic market is most direct. When the index rises, people increase purchases of goods and services, boosting domestic demand, benefiting manufacturing and service sectors. Conversely, a decline in the PCE index may slow economic growth.

Practical Investment Insights

Investors should incorporate the U.S. PCE Price Index into their macroeconomic analysis framework as a core component. Accurately interpreting the signals behind the PCE index can help investors gain an edge in asset allocation and strategic adjustments.

When the PCE index shows an upward trend, caution is needed regarding potential cost pressures from a rising dollar; when it declines, opportunities may arise from a weakening dollar and capital inflows. By continuously monitoring the release schedule and latest data of the U.S. PCE, investors can more precisely capture market dynamics and make timely investment decisions.