The US Bureau of Economic Analysis (BEA) announced on the 19th (local time) a revision to the methodology for calculating the Personal Consumption Expenditures (PCE) price index, a key inflation indicator used by the Federal Reserve. The changes will be implemented on September 30 and will affect three sectors: portfolio management and investment advisory services, legal services, and computer software and related services. The revision aims to more accurately reflect the composition of goods and services within these consumption categories. Market analysts note that the methodology change could influence the Fed's inflation assessments and interest rate decisions.
BEA Announces PCE Methodology Revision Covering 2021-2026 Period
According to the BEA website on the 19th (local time), the BEA issued an 'Advance Notice of 2026 Annual Revision of National Accounts' stating that it will conduct annual updates to the National Income and Product Accounts (NIPAs) and industry accounts starting September 30. The revision period covers the first quarter of 2021 through the first quarter of 2026. Major economic indicators including Gross Domestic Product (GDP), Gross Domestic Income (GDI), and consumer spending will be revised during this update.
Three Sectors Face Price Measurement Changes in PCE Calculation
The BEA will change the price measurement methodology for three sectors related to personal consumption expenditures. For computer software and related services, the BEA will replace the existing computer software and related equipment CPI with a composite price index utilizing computer software CPI, game software publishing PPI, and web hosting and information technology (IT) infrastructure provision services PPI. The BEA explained that the new methodology will more accurately reflect the composition of goods included in these consumption categories.
For legal services, the BEA will shift from using CPI to calculate household consumption of legal services to applying a self-constructed price index using multiple legal services PPI components. For portfolio management and investment advisory services, the BEA will utilize a quantity estimation method based on the Bureau of Labor Statistics (BLS) Current Employment Statistics (CES) to more accurately reflect service consumption volume.
Economists Estimate 0.2 Percentage Point Reduction in Core PCE
The methodology changes could result in a lower core PCE inflation rate compared to the previous calculation method. According to some foreign media reports, economists estimated that applying the new calculation method could lower the core PCE increase by approximately 0.2 percentage points compared to the existing calculation. UBS economist Alan Detmeister analyzed that the software price calculation method change could produce a decline effect of approximately 0.1 percentage points, while the investment management services change could generate a decline effect of approximately 0.2 percentage points. However, the legal services price change could work in the direction of raising inflation, so the overall effect must be viewed by comprehensively considering the impact of each category.
Core CPI-PCE Gap Widens as Methodology Revision Approaches
As the gap between core CPI and core PCE has recently widened, this revision could affect PCE inflation trends. As of June, the US core CPI increase rate was 2.6%, but economists estimated the core PCE increase rate at approximately 3.3%. Market analysts note that while the statistical revision itself does not signify actual inflation decline, it could have some influence on the Fed's inflation assessment process.
FAQ
What did the BEA announce on the 19th regarding PCE calculation?
The BEA announced on the 19th (local time) that it will revise the methodology for calculating the Personal Consumption Expenditures (PCE) price index, affecting three sectors: portfolio management and investment advisory services, legal services, and computer software and related services. The changes will be implemented on September 30.
How much could the methodology change affect core PCE inflation rates?
Economists estimated that applying the new calculation method could lower the core PCE increase by approximately 0.2 percentage points compared to the existing calculation. UBS economist Alan Detmeister analyzed that software price changes could reduce core PCE by 0.1 percentage points and investment management services changes by 0.2 percentage points.
What is the current gap between core CPI and core PCE as of June?
As of June, the US core CPI increase rate was 2.6%, while economists estimated the core PCE increase rate at approximately 3.3%, showing a gap of approximately 0.7 percentage points between the two inflation measures.
