David Haggith Says Planned PCE Changes Could Lower Reported Inflation

David Haggith

The Federal Reserve is preparing to make its inflation gauge easier to manage under Trump’s newly appointed Fed chair, Kevin Warsh, according to this commentary. Warsh has assembled an advisory panel to find a way to make the Fed’s target measure show lower inflation more consistently than it does now.

That may make the numbers look better, but it also would make it easier for the Fed to reach a target it has not met since it went off course five years ago, when Jerome Powell kept cutting interest rates and buying Treasuries to create more money during a period of inflation he described as transitory. In the author’s view, the Fed should instead be reduced to a single mandate of currency stability, with “stability” defined as zero percent price inflation.

Warsh’s approach, the article argues, is to change the gauge itself so that it produces a slightly more favorable reading. The author says the inflation index already understates price pressures, which he argues helps explain why Americans are angry about a declining economy even though official data still shows modest real GDP growth and only moderate inflation.

Government and Fed-approved economic data has shown that inflation is once again on the rise, while independent data suggests true inflation is much higher than officials admit, the article says.

The author also points to what he describes as previous efforts to manage the numbers. He says Trump fired the head of the Bureau of Labor and Statistics last September because the figures were unfavorable, installed a new chief, and later sought to withhold key monthly data during last year’s government shutdown. He also notes that Trump has asked for corporations to stop issuing quarterly earnings reports and instead report only twice a year.

Now, the article says, Warsh is considering another incremental revision. A coming revamp of the Federal Reserve’s preferred inflation gauge could be enough to discourage interest-rate increases this year, even if it does not dramatically change the overall picture on prices. The writer compares the process to boiling frogs slowly enough that the public does not react.

The update in question is the annual revision of the personal consumption expenditures price index, or PCE, due in September from the Bureau of Economic Analysis. Economists quoted in the piece said the changes could lower core inflation by roughly one-tenth to nearly three-tenths of a percentage point if applied to the latest data.

Fed officials were nearly unanimous at their June meeting that inflation risks remained tilted to the upside, the article says. But because they were also evenly split on whether a rate hike would be needed in 2026, a downward revision to PCE could give Warsh and dovish policymakers more room to avoid tightening.

Stephanie Roth, chief economist at Wolfe Research, said the case for the Fed staying on hold has strengthened substantially. She cited the planned PCE update, a recent decline in oil prices after the height of the Iran war in April and May, and a latest jobs report that suggested labor-market momentum in recent months may have been overstated.

The author agrees that the jobs figures have been overstated, but rejects the idea that lower fuel prices will continue to help inflation. He says the Iran conflict has intensified, and claims that Iran rejected Trump’s latest ceasefire proposal. He also says Trump incorrectly told the public that Iran was begging to make a deal.

The BEA previewed several changes to the PCE methodology, including revisions to how prices are measured in legal services, computer software and investment advice, categories that have outsized effects on the index. Citi economists called the pending updates “a big deal,” according to the article.

Warsh has also previously supported a “trimmed mean” inflation measure that excludes volatile components. The author notes that the Fed already relies on core inflation, which excludes food and energy, and argues that excluding even more items would go further still, despite the fact that households cannot exclude those costs from their own budgets.

The article says the media has framed the change as a technical repair. Morningstar described it as a fix for flaws in the PCE index. The author rejects that characterization and argues the revision is meant to produce friendlier numbers.

The BEA’s update is expected to make the Fed’s preferred core PCE measure show inflation rising slightly more slowly this year than previously reported. The estimated reduction could be between 0.2 and 0.3 percentage points. That would mean the 3.4% annual increase in core PCE for the 12 months ending in May could be revised down to 3.2% or 3.1%.

Even with the new method, the author says, inflation would still be rising too quickly for the Fed’s 2% goal. He adds that the revision would at least make the figures look less alarming, which matters because the Fed’s preferred gauge shapes the policy debate even when households are focused on the prices they actually pay.

The planned changes affect three categories that help shape the core PCE rate: portfolio-management fees, computer software and legal services. The article says these categories are being revised because of the way their prices are measured and because they have a large effect on the index.

For portfolio-management fees, the BEA will change the formula so that it is less dependent on swings in the stock market. Under the old method, the government estimated that financial-advice fees had risen 22% over the past year. Oxford Economics estimates the new approach would reduce the annual increase to about 13%.

The article also says the computer-software index is being refreshed to give more weight to gaming and business information technology, categories that have grown in importance. Both categories have shown slower computer-related inflation than previously reported. The old software index showed prices up 17% year over year, a record pace. The new method would likely show an increase of around 10% to 11%, although some analysts say it may still overstate software inflation.

Those analysts point to artificial intelligence, which improves software quality. The author notes that the government already adjusts for quality improvements in inflation data, which lowers reported inflation because consumers are assumed to get more for their money. He argues that the methodology helps make products such as cars and electronics look less inflationary even though buyers must still pay for built-in features that used to be optional.

The article then returns to the broader inflation picture, citing Trump’s own comments in June at the closing press conference for the G7 summit in Évian-les-Bains. Trump said he had called a halt to hostilities with Iran because continued bombing would not reopen the Strait of Hormuz, commercial ships would stay away, and emergency oil supplies would be exhausted in about four weeks. He said he did not want to be “the late, great Herbert Hoover,” according to The Atlantic.

The article ends by saying the deeper discussion of wartime inflation is reserved for paying subscribers, and that the government’s efforts to adjust its gauges will not prevent the inflation pressures it expects to see in the months ahead.

About the author

David Haggith

David Haggith is the publisher and editor-in-chief of The Daily Doom, a non-partisan daily collection of economic, social and political news and commentary.

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