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Methodology change expected to trim core PCE inflation readings
Wells Fargo estimates the BEA’s updated core PCE methodology would lower the current year over year run rate by about 0.2 percentage points, but still leave it around 3.2% versus a 2% Fed target.
Wells Fargo economists Tom Porcelli and Sarah House said upcoming changes to the U.S. Bureau of Economic Analysis methodology for the Personal Consumption Expenditures price index will affect how core PCE inflation is measured starting with data from 2021 onward.
They estimate the new approach will reduce current core PCE inflation by about 0.2 percentage points, bringing May’s reading to around 3.2% compared with 3.4% as currently published, according to FXStreet.
The economists noted the revision would be rolled out in the BEA’s annual update on September 30, and that while the spot reading may look softer, the methodology changes are not expected to create a consistent downward bias in inflation.
Even with the modest trimming effect, they said there is still a wide gap versus the Federal Reserve’s 2% target, leaving the inflation rate roughly 1 percentage point above that goal.