The Bureau of Economic Analysis (BEA) announced methodological revisions last week that will alter how price changes are calculated for portfolio management and investment advice services, legal services, and computer software and accessories. Those adjustments will be incorporated into the BEA's annual gross domestic product revisions scheduled for September 30 and will be applied retroactively to 2021.
Because the PCE price indexes feed into the monthly personal income and outlays report that the Federal Reserve watches for its 2% inflation target, economists say the BEA's methodological updates could lead to lower reported core inflation for May, the most recent month for which the BEA has released data.
Goldman Sachs economists have estimated that the year-on-year increase in the core PCE inflation rate for May could be revised down to 3.2% from the 3.4% figure the BEA published last week. JPMorgan analysts expected a smaller change - a mild downward revision to 3.3% after rounding.
The BEA described the specific changes for each affected component. For computer software and accessories, the agency said it will move to a composite price index that draws on related data from both the Consumer Price Index and the Producer Price Index. The composite will include PPI components such as game software publishing and hosting and information technology infrastructure provisioning. The BEA noted that the current approach relies solely on CPI data for this deflator.
On that point, JPMorgan economist Abiel Reinhart said: "the PCE index receives more than 30 times as much weight as the CPI index, while the items priced for the CPI index are not conceptually identical to the PCE definition."
For legal services, the BEA will replace the previously used sources with PPI components. The agency flagged that values not published by the Bureau of Labor Statistics because of quality concerns had been used to calculate legal services prices, and that these series "have recently exhibited erratic changes that cannot be corroborated and are not consistent with other source data."
Portfolio management and investment advice services will be remeasured using a Bureau of Labor Statistics employment-based quantity extrapolator for the industry. This will replace the prior practice of "deflating nominal consumer spending on these services with the BLS Producer Price Index for portfolio management and investment advice services."
Goldman Sachs economists explained how the timing of estimates could change under the new approach: "The new methodology implies that the first two estimates of a given month of portfolio management inflation will likely be based on average hourly earnings growth," they wrote. "Subsequent estimates will be based on the difference between more accurate sources of nominal spending growth and growth in total hours worked."
These methodological shifts will appear in the BEA's comprehensive revisions to GDP at the end of September and will be applied to historical data back to 2021. Economists and market participants will be watching the revisions for how they alter headline and core inflation dynamics in the official statistics, particularly for May's core PCE reading.