By Megan Leonhardt
U.S. statistical agencies are constantly working to incorporate better datasets and improve their models to better gauge the health of the economy. One result is looming changes to several components of the personal-consumption expenditures price index, which the Bureau of Economic Analysis will implement in September. Economists expect the updated calculations to lower the inflation measure, albeit not to 2%, the Federal Reserve's longstanding annual target.
The BEA announced last week that it is planning to update the price calculations for computer software and accessories, legal services, and portfolio management services in the PCE, the Fed's preferred inflation measure. Citi economist Veronica Clark estimates that the methodology changes will depress core PCE, which excludes food and energy, by about quarter of a percentage point in September on a year-to-year basis.
Omar Sharif, founder of Inflation Insights, estimates that core PE would have risen 3.25% in May, compared with the official reading of 3.4%, had the changes already been implemented.
The changes could depress the annual pace of inflation to 3% or less by the end of the year. Fed officials currently expect core PCE inflation to be 3.3% in December.
The updates are expected to create volatility in inflation estimates, at least in the short term. Market estimates for PCE inflation typically reflect previously published components of the consumer-price index and the producer-price index. "It is still highly uncertain what the effects of new calculations will be and it will likely take many months of data to understand the new calculations," Clark says.
The changes will be introduced in the Sept. 30 release of the monthly PCE price index and the next measure of gross-domestic-product growth.
The statistical changes are designed to incorporate improved methodologies, writes BEA economist Lisa Mataloni. The BEA previously relied on the CPI's legal services component, for example, but the data that inform it haven't been published since 2023 as they don't meet Bureau of Labor Statistics quality guidelines. Moreover, the dataset has recently exhibited "erratic changes" that can't be corroborated and are inconsistent with other source data, she noted.
Instead, the BEA will now use a composite price index that incorporates details from the PPI data for selected legal services consumed by households. The BEA has already shifted its methodology to use PPI legal services instead of CPI a couple of times this year.
The BEA said it would update its computer software and accessories data to "better reflect the composition of products included in this category." Specifically, a composite price index will be generated using CPI data for computer software and accessories, and PPI data for game software publishing, hosting, and active server pages.
Updates to data for portfolio management and investment-advice services could have the biggest impact on PCE. The BEA says it aims to have the data better reflect the timing and quantity of services consumed. Sharif calculated that the proposed changes would have reduced May's core PCE rate by about 0.14%, but said it isn't clear the changes will exert a consistent downward bias on inflation readings.
"While these new deflators could lead to some downward pressure over shorter horizons relative to the current PCE deflators in use, they seem to be less of an issue over longer periods," Sharif says.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
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