Measurement tweaks will make inflation data look better
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Changes to the methodology underneath the Federal Reserve's go-to inflation measure are on track to make the numbers look a couple of ticks better later this year.
Why it matters: The changes are entirely defensible on technical grounds and should make the Personal Consumption Expenditures Price Index better able to mirror overall price dynamics over time.
- But coming at a fraught moment — when the independence of statistical agencies has been attacked and the Fed has overshot its inflation target for half a decade — the optics aren't great.
State of play: The Bureau of Economic Analysis, which calculates the PCE inflation measure, announced late last month the methodological changes to how price changes are calculated in three subcategories.
- It will change the calculation of prices for portfolio management and investment advice services, computer software and accessories, and legal services.
- The changes will be included in data revisions released Sept. 30.
By the numbers: Analysts have been modeling how the changes will affect inflation readings, with the consensus view that they will reduce core PCE inflation by about 0.2 percentage point.
- Core PCE inflation was 3.4% for the 12 months ended in May, and has been above the Fed's 2% target every month since March 2021.
Zoom in: There are some good technical reasons behind the changes.
- The current portfolio management price measure, for example, tends to simply reflect the recent performance of the stock market rather than some measure of the underlying prices and inflation trends.
- If a person pays a fixed 1% portfolio management fee, for example, and their portfolio rises by 20%, it counts as a 20% rise in prices for asset management services.
- "What ought to be recorded as an increased quantity of services consumed is instead recorded as increased prices," former Fed governor Stephen Miran said in a speech in December.
Of note: Miran, along with Fed staff economists Alessandro Barbarino and Anthony M. Diercks, laid out flaws in the measurement of computer software and accessories in a paper published in May.
- Among the issues in play are how portable memory devices, video games and other tech products are counted.
- "Grand Theft Auto VI may yet have a chance to move the Treasury curve," JPMorgan economist Abiel Reinhart quipped in a note.
Zoom out: It's hard to separate the newest technical changes from the backdrop against which they occur.
- Less than a year ago, President Trump fired the commissioner of the Bureau of Labor Statistics after a weak jobs report, and his original nominee to replace her was widely criticized as underqualified.
- Brett Matsumoto, whose nomination for the job is pending in the Senate, has attracted broader support.
- In light of Trump's demands for Fed interest rate cuts, the timing of changes that make inflation data look better offers ammunition for conspiracists, even if the technical justifications make sense.
What they're saying: "Given the growing mistrust around official data, we urge the BEA to act with more transparency around timing, weights, and historical revisions," Vikas Patel with Employ America, a liberal think tank, wrote.
- The statistics authorities also should "extend that scrutiny to categories left untouched by this update but subject to the same measurement challenges," he added.
