The government is about to revise how it calculates one of the Federal Reserve's most important inflation gauges, and the result will almost certainly make price pressures look a bit smaller when new data rolls out this fall.
The Bureau of Economic Analysis announced late last month that it will change the methodology for measuring price changes in three categories: portfolio management and investment advice, computer software and accessories, and legal services. The revised figures arrive September 30.
The technical case for these shifts is solid. The current formula for portfolio management fees, for instance, treats changes in stock market performance as if they were changes in inflation. When someone pays a fixed 1% fee on a portfolio that gains 20%, the government currently records that as a 20% jump in asset management prices, when really it should reflect the quantity of services consumed, not market movements.
Economists modeling the impact expect core PCE inflation to drop by roughly 0.2 percentage point. That matters because core PCE, which excludes volatile food and energy, sat at 3.4% in the 12 months through May and has remained stubbornly above the Fed's 2% target since March 2021.
Computer software measurements also needed work. The way the government currently prices video games, portable memory devices, and similar tech products has distorted the inflation picture. Former Fed governor Stephen Miran and two Fed staff economists detailed these flaws in research earlier this year, suggesting the changes were overdue from a purely statistical standpoint.
Yet the timing creates a political headache. Less than a year ago, President Trump fired the Labor Statistics commissioner over weak jobs data. His administration has since pushed hard for Fed rate cuts. Now, just as the White House continues pressuring the central bank, a change that will make inflation data look better is hitting the calendar.
Critics worry the optics will further undermine trust in government data at a moment when statistical independence is already under fire. Vikas Patel, an economist at the liberal think tank Employ America, called for more transparency around the revisions and urged the BEA to examine other measurement problems lurking in untouched categories.
The methodological adjustments are defensible on their merits. But defending them becomes harder when the backdrop includes attacks on statistical agencies and questions about whether policy decisions are being driven by political pressure rather than economic reality. The changes should have arrived in calmer times, when their technical merit could stand on its own without inviting suspicion.
Author James Rodriguez: "Sound methodology can't survive in a climate of political skepticism, and the Fed's inflation debate is now poisoned by both."
Comments