The U.S. statistical agency adjusts its statistical program, which may lower the Fed’s preferred inflation indicator
Special topic: The Federal Reserve’s interest rate decision is coming, and the market is divided on expectations of interest rate hikes. The Fed's preferred inflation indicator is about to undergo a statistical overhaul. The adjustment may ease pressure on policymakers to raise interest rates quickly as they debate how to curb a new round of rising prices. Federal Reserve officials will meet this week to finalize interest rates, and at the same time, the U.S. Bureau of Economic Analysis is revising the way it accounts for price increases in parts of the economy. Markets expect the adjustment to lower recent personal consumption expenditures inflation readings. Inflation is rising rapidly, driven by the U.S.-Iran conflict and a boom in the artificial intelligence industry, and policymakers are divided on how to respond. Overall PCE inflation rose to 4.1% in May, a three-year high; core PCE inflation rose to 3.4%, both indicators significantly higher than the central bank's 2% target. Economists expect the revised PCE statistical methodology to reduce core inflation readings by about 0.2 percentage points, creating more room for the Federal Reserve to keep interest rates unchanged in the short term. Alan Detmeister, an economist and former inflation researcher at the Federal Reserve, said: "Inflation data moving closer to the Fed's target will make it easier for the Fed to choose not to raise interest rates." Krishna Guha, a former New York Fed official and now chief economist at Evercore ISI, said that "as long as the market recognizes the credibility of the new statistical series," the downward PCE reading will make it "easier for Fed Chairman Kevin Warsh to avoid starting to raise interest rates." The statistical adjustment comes as Fed officials engage in a heated debate over whether and when to raise interest rates to combat inflation. At least two members of the Federal Open Market Committee, which is responsible for determining interest rates, have signaled that they may vote in favor of raising interest rates as early as this week. At the same time, U.S. President Donald Trump is exerting intense political pressure on the Federal Reserve to cut interest rates. The current benchmark interest rate range remains at 3.5% to 3.75%. Trump stated this week that although he believed that Warsh "wanted to make the right decision" on the interest rate issue, some members of the Federal Reserve Board of Governors were extremely political and "perhaps had ulterior motives", which limited Warsh's ability to do so. This statistical method update by the U.S. Bureau of Economic Analysis will take effect in September. The adjustment covers data related to investment portfolio management fees, computer software and accessories, and legal services, and historical data since 2021 will be retrospectively revised. Critics pointed out that although this adjustment is part of the regular revision process of the Bureau of Economic Analysis, the adjustment objects happen to be focused on categories that push up inflation. At a time when monetary policy is in the spotlight politically, such a move risks diluting inflation readings. Detmeister said: "The official did not fully explain why these groups of statistical sub-items were specifically adjusted. The adjustment targets selected this time seem to have certain political considerations." The two price statistical sub-categories included in the revision this time - computer software and accessories, and investment portfolio management services - are among the five main drivers of inflation. Omar Sharif, an analyst at Inflation Insights, said that although "the adjustment itself has a reasonable basis... but the concentrated reduction of a series of sub-data that is highly related to higher inflation does not give a good impression." Some economists complained that the Bureau of Economic Analysis did not fully disclose the details of the adjustments, making it difficult for analysts to assess the actual impact of the changes on inflation readings. The U.S. Bureau of Economic Analysis responded that the annual data revision is "promoted by senior professionals at the Bureau to maintain the accuracy and reliability of statistical estimates" and is aimed at optimizing price measurement models. After the adjustment is completed, the PCE inflation indicator and the Consumer Price Index (CPI) will be closer to each other. The latter is a narrower indicator to measure the price pressure faced by the American people. Affected by the strengthening stock market, PCE's portfolio management services segment has surged sharply in recent months; while the legal services segment previously relied on undisclosed and highly volatile agency data for calculations. A latest research paper co-authored by former Federal Reserve Board member Stephen Millan points out that there has been an unprecedented rise in software category prices in the past few months, and there is a "mismatch problem" in the software price measurement method under the current statistical framework. Michael Pierce, chief U.S. economist at Oxford Economics, said that nothing in the U.S. Bureau of Economic Analysis' update "appears abnormal" and that any move to optimize the way inflation is measured is generally welcome.
“It’s hard to see what’s wrong with this kind of optimization and adjustment,” he said. “Statistical agencies continue to revise accounting rules and incorporate optimization plans and better data sources, which should increase our confidence in relevant data.” Although the June PCE inflation data due to be released on Thursday is expected to fall back, there is a high probability that it will still be significantly higher than the Fed's target. In the long term, the impact of the Bureau of Economic Analysis' statistical revisions on the central bank's short-term policy decisions is expected to be limited, and factors such as the expansion of the artificial intelligence industry will continue to push up core inflation levels. Robert Sorkin, chief U.S. economist at PGIM Investment Management, said: "I don't think this will change the policy path. According to our forecast, as long as the core PCE continues to be above 3% throughout the year, the Fed will choose to raise interest rates." Open a futures account on Sina's cooperative platform, safe, fast and guaranteed
“It’s hard to see what’s wrong with this kind of optimization and adjustment,” he said. “Statistical agencies continue to revise accounting rules and incorporate optimization plans and better data sources, which should increase our confidence in relevant data.” Although the June PCE inflation data due to be released on Thursday is expected to fall back, there is a high probability that it will still be significantly higher than the Fed's target. In the long term, the impact of the Bureau of Economic Analysis' statistical revisions on the central bank's short-term policy decisions is expected to be limited, and factors such as the expansion of the artificial intelligence industry will continue to push up core inflation levels. Robert Sorkin, chief U.S. economist at PGIM Investment Management, said: "I don't think this will change the policy path. According to our forecast, as long as the core PCE continues to be above 3% throughout the year, the Fed will choose to raise interest rates." Open a futures account on Sina's cooperative platform, safe, fast and guaranteed