The method for calculating personal consumption expenditures (PCE), a key metric used by the U.S. Federal Reserve in its interest rate decisions, is being changed. Experts believe this will have the effect of lowering the inflation index. With U.S. President Donald Trump having pressed the Fed to cut interest rates, attention is turning to what impact this measure will have.
According to Axios on Friday, the U.S. Bureau of Economic Analysis (BEA), which calculates PCE, recently announced that it would change the calculation method for three detailed subcategories. The items involved are the pricing methods for portfolio management and investment advisory services, computer software and peripherals, and legal services.
This measure will be reflected starting with the August PCE, to be released on Sept. 30. In addition, the BEA plans to recalculate and release the past five years of monthly and quarterly PCE data under the new standard to minimize distortions caused by the change in statistical methodology.
Earlier, Fed Chairman Kevin Warsh proposed the "trimmed mean PCE" as a new metric. The trimmed mean PCE is calculated by removing a certain proportion of the most volatile top and bottom items and then averaging the remaining items. It is a metric that filters out "outliers" to identify the underlying inflation trend. Warsh said he prefers this inflation metric over core PCE, adding, "What matters is not geopolitical shocks but underlying inflation."
Experts forecast that this change will lower core PCE by about 0.2 percentage point. Core PCE on a 12-month basis through May of this year stood at 3.4 percent, far above the Fed's 2 percent target.
While the change is assessed as technically valid, Axios noted that the timing is exquisite. With the midterm elections just four months away, public opinion toward the Trump administration is worsening amid inflation stemming from the war in Iran. President Trump has openly pressured the Fed to cut interest rates since taking office. Just a year ago, he dismissed the head of the Bureau of Labor Statistics (BLS) when employment figures came in weak.
