United States: New methodology trims Core PCE inflation – Wells Fargo
Wells Fargo economists Tom Porcelli and Sarah House discuss upcoming BEA changes to the Personal Consumption Expenditures (PCE) Price Index that will affect data from 2021 onward. They estimate the new methodology will lower current core PCE by about 0.2 percentage points, bringing May’s rate near 3.2% versus 3.4% published, but still roughly 1 percentage point above the Federal Reserve’s (Fed) 2% target.
Method tweaks modestly lower core PCE
"We want to flag a few methodology changes that are being made to the Fed’s preferred measure of inflation, the PCE price index. The changes will be rolled out in the BEA’s annual update on September 30 and will impact data from 2021 onward."
"We expect the changes will shave only about 0.2 percentage points off the current y/y run-rate of core PCE. So the impact on actual inflation looks to be modest, but the changes are welcome just the same."
"Despite the softer spot reading, note that these changes will not consistently deliver lower inflation. Said differently, we have no reason to believe these changes will generate a structural downward bias to inflation."
"And while a two-tenths reduction is large in the scope of the typical size of revisions, it is small in the context of the Fed’s current inflation troubles."
"The new measurements won’t change the fact that inflation is still roughly a full percentage point above target."
"As a final note, the methodology changes are likely to make mapping monthly PCE estimates after the CPI and PPI are published slightly more difficult since the weightings of the new BEA composite indexes won’t be published and the “price” index for portfolio management & investment advice will no longer be observable from the monthly PPI report."
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