Recalculating Inflation

Revisions to the PCE methodology materially lowered reported U.S. inflation without reducing the prices consumers actually paid.

• The BEA revised the PCE Price Index back to the first quarter of 2021, cutting July core inflation by 36 basis points, from 3.34% to 2.98%.
• For portfolio management services, the BEA replaced a producer price index with an indirect estimate based on spending, service volumes, employment and hours worked; July inflation fell from 20.6% to 8.6% year over year, according to Barclays.
• This portfolio-management change reduced aggregate core PCE inflation by approximately 0.2 percentage points, while a revised approach to computer software and accessories lowered its inflation rate from 21.2% to 15.6% and reduced core PCE by another 0.1 percentage point.
• Neither change altered consumer prices; both changed how those prices were measured, with the portfolio-management and software revisions together accounting for much of the 36-basis-point reduction.
• Because core PCE guides Federal Reserve policy expectations, the lower reading could reduce expectations for additional tightening, pressure Treasury yields lower and potentially reduce federal borrowing costs amid rising interest expenses.

Takeaway: Investors should distinguish methodological disinflation from genuine price relief, because revised data can influence policy and markets even though consumers did not pay less and the original readings may disappear from the historical narrative.