The Bureau of Economic Analysis (BEA) announced late last month that it will implement methodological changes to how it calculates price changes for three specific subcategories within the Personal Consumption Expenditures (PCE) price index. These categories include portfolio management and investment advice services, computer software and accessories, and legal services. These revisions are scheduled to be incorporated into data releases on September 30, and the updated figures will be applied retroactively to 2021. The technical justification for these changes is considered sound, aiming to better reflect actual price dynamics rather than distortions from factors like market performance or outdated data sources.
Analysts anticipate that these adjustments will lead to a modest reduction in core PCE inflation, with a consensus expectation of roughly a 0.2 percentage point decrease. For instance, core PCE inflation, which excludes volatile food and energy prices, stood at 3.4% for the 12 months ending in May and has remained above the Federal Reserve's 2% target since March 2021. Goldman Sachs economists have estimated that May's year-on-year core PCE could be revised down to 3.2% from the previously reported 3.4%, while JPMorgan analysts project a mild downward revision to 3.3%. This minor shift could alter key inflation readings closely watched by the Federal Reserve.
The changes address specific measurement flaws. For portfolio management, the previous method often misinterpreted stock market performance as a change in asset management prices; the new approach will use an employment-based quantity extrapolator. For computer software and accessories, the BEA will transition to a composite price index drawing on both the Consumer Price Index (CPI) and Producer Price Index (PPI) data, as opposed to solely relying on CPI. For legal services, the BEA will replace older, unreliable sources with more accurate PPI components, addressing concerns about erratic and uncorroborated data. These revisions aim to improve the accuracy of inflation measurement.
While technically justified, the timing of these changes has raised some concerns about optics, given the current environment of high inflation and past scrutiny of statistical agencies. Critics highlight the importance of transparency from the BEA regarding the timing, weights, and historical revisions to maintain public trust. Despite these concerns, economists largely agree that the technical improvements are warranted and will lead to a more accurate reflection of underlying price trends that the Federal Reserve uses to guide its monetary policy decisions.
