Key facts
- US May core PCE inflation may be revised lower due to upcoming methodological changes by the Bureau of Economic Analysis.
- The BEA will update calculations for portfolio management, legal services, and computer software and accessories prices.
- These revisions will be applied retroactively to 2021 as part of the annual GDP revisions on September 30.
- Goldman Sachs predicts the year-on-year core PCE inflation could be revised to 3.2% from the reported 3.4%.
- JPMorgan anticipates a slight downward revision to 3.3% after rounding.
The U.S. Bureau of Economic Analysis (BEA) is set to implement methodological changes to its calculation of the Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, later this year. Economists anticipate these changes could lead to a downward revision of the May core PCE inflation rate, which was initially reported at 3.4% year-on-year. Goldman Sachs economists estimate this figure could be trimmed to 3.2%, while JPMorgan expects a mild revision to 3.3% after rounding.
The BEA announced that the revisions, which will be incorporated into the annual gross domestic product (GDP) updates on September 30 and applied retroactively to 2021, will affect the calculation of prices for portfolio management and investment advice services, legal services, and computer software and accessories.
For computer software and accessories, the BEA will transition to a composite price index derived from both Consumer Price Index (CPI) and Producer Price Index (PPI) data, including PPI for game software publishing and IT infrastructure. Previously, only CPI data was used. JPMorgan economist Abiel Reinhart noted that the PCE index carries significantly more weight than the CPI, and the items priced for CPI are not conceptually identical to the PCE definition.
In the case of legal services, the BEA will now utilize PPI components. This change addresses concerns about the use of erratic and uncorroborated data from the Bureau of Labor Statistics (BLS) that exhibited changes inconsistent with other source data. For portfolio management and investment advice services, the BEA will replace the current method of deflating nominal consumer spending with the BLS PPI for these services. The new methodology will initially rely on average hourly earnings growth, with subsequent estimates based on the difference between nominal spending growth and total hours worked, according to Goldman Sachs economists.