Fed’s favorite inflation gauge is about to get a statistical tuneup
The BEA’s PCE changes could shave 0.2 to 0.3 percentage points from core inflation readings as the Fed weighs rates.
By Frankie Delgado · News Reporter
4 min read
The inflation number watched most closely inside the Federal Reserve is getting revised at a touchy moment: just as policymakers consider whether U.S. interest rates may need to rise again this fall.
The Bureau of Economic Analysis plans to change parts of the personal consumption expenditures price index, known as PCE, with the revisions set to take effect Sept. 30. The core version of that index, which strips out food and energy, is the Fed’s preferred read on underlying inflation.
The practical effect, according to estimates cited by MarketWatch, is likely to be a slightly cooler inflation reading for this year. The adjustment could reduce core PCE by about 0.2 to 0.3 percentage points. A 3.4% annual increase for the 12 months through May could become 3.2%, or possibly 3.1%.
That would still leave inflation above the Fed’s 2% target. It could, however, give officials who oppose another rate increase a bit more support in the debate.
Why the Fed looks past gas-price drama
The broader PCE index has been jerked around by energy prices this year. West Texas crude rose 73%, from $65 a barrel before the U.S. conflict with Iran began at the end of February to as much as $113 in early April, according to the MarketWatch report.
Oil later dropped to $68 in early July as the U.S. and Iran tried to reach a peace agreement, then climbed back to $86 this week after hostilities resumed.
That swing showed up in inflation. The main PCE index rose 4.1% in the 12 months through May, its highest rate in three years, after running at 2.9% in February. The June reading, due next week, is expected to slow to 3.7%.
Those jumps are why Fed officials focus heavily on core PCE. Food and energy can move sharply from month to month, while the core number is meant to give a steadier signal on price trends.
Three categories are getting changed
The BEA is revising how it measures three pieces of the core PCE index:
- Portfolio-management fees
- Computer software
- Legal services
Portfolio-management fees have been a particular headache because the existing method is closely tied to stock-market moves. When the S&P 500 rises, the index can show a jump in financial-advice costs. Under the current approach, the government estimates those fees rose 22% over the past year.
Oxford Economics estimates the new method will put that increase closer to 13%.
Software is also being reworked. The updated index will put more weight on gaming and business information technology, categories that now make up a larger share of spending. Those areas show slower price growth than the current software measure.
The existing software index shows prices up at a record 17% annual pace. The revised approach would show an increase nearer 10% to 11%, according to the estimates cited by MarketWatch, though some analysts think even that may still overstate software inflation because artificial intelligence spending can improve product quality.
Legal services move in the other direction. Analysts say the new legal-cost method could add slightly to inflation. The BEA had used an unpublished consumer-price-index survey with a small sample, but said that measure had become “erratic” after it was last publicly available in 2024. Earlier this year, the agency switched to a producer-price-index gauge that it found more consistent.
Politics, timing and the Fed
The timing is sensitive because President Donald Trump’s firing last year of the Bureau of Labor Statistics chief raised concerns about political pressure on federal data agencies.
Economists who track inflation closely say these PCE changes were expected. Michael Pearce, chief U.S. economist at Oxford Economics, wrote that suspicions about bias or political influence would be wrong, according to MarketWatch.
The BEA also gave advance notice this time, announcing the planned PCE changes on June 24. Its director, Vipin Arora, was appointed in 2022 during President Joe Biden’s term.
Bank of America economist Aditya Bhave wrote that core PCE would remain well above 2% even after stripping out temporary factors. In other words, the Fed may get a cleaner thermometer, but the fever is still there.
This story draws on original reporting from MarketWatch.