The US Commerce Department plans to revise the components used to calculate the Personal Consumption Expenditures price index. The change is expected to lower the PCE inflation reading by 0.2 percentage point compared with the current method. [Getty Images]
The US Commerce Department plans to revise the components used to calculate the Personal Consumption Expenditures price index. The change is expected to lower the PCE inflation reading by 0.2 percentage point compared with the current method. [Getty Images]

The US Commerce Department is revising some of the components used to calculate the Personal Consumption Expenditures price index, the Wall Street Journal reported Sunday, projecting that the new methodology — set to take effect with next month's data — would lower the PCE inflation reading by 0.2 percentage point.

The Federal Reserve uses the core PCE price index, which strips out energy and food, as its benchmark when setting monetary policy. A 0.2-percentage-point reduction in the core PCE reading could give the Fed more room to maneuver, analysts said.

According to the Journal, the Commerce Department's Bureau of Economic Analysis is revising the way it calculates three sub-indexes: asset management services, software and legal services. The changes will also be applied retroactively to data going back five years.

The software sub-index will be recalculated to incorporate price data on video game software and web hosting services — the cost of renting internet server space — compiled by the Bureau of Labor Statistics under the Labor Department. Alan Detmeister, an economist at investment bank UBS, estimated that this component change alone would lower the PCE inflation reading by about 0.1 percentage point.

The asset management services component will also shift from the current method — which tallies the total fees individuals pay for asset management — to a more complex approach that compares the revenue earned by asset management firms against their workload. Under the current system, investors who entrust their assets to a management firm pay fees calculated as a fixed percentage of those assets, meaning fees rise automatically when share prices climb.

The revision reflects criticism that fee increases driven by rising share prices do not represent actual increases in the price of the service and should not be counted as inflation. Detmeister estimated that this change would lower the PCE inflation reading by about 0.2 percentage point.

For legal services, the Bureau of Economic Analysis will replace the Consumer Price Index data that the Bureau of Labor Statistics has been using with the Producer Price Index. Analysts said this switch is likely to push the PCE inflation reading higher, not lower.

Vikas Patel, a program manager at the think tank Employ America, told the Journal that "taken together, the revisions to the calculation methodology will moderate the PCE inflation reading."

The Bureau of Economic Analysis said the changes are routine adjustments needed to keep its statistics as accurate as possible. Connie O'Connell, a bureau spokeswoman, said: "These are decisions made by our staff to maintain the accuracy and reliability of our measures, without any other considerations."

Some observers, however, have questioned whether the revisions amount to a tailored fix designed to ease the political burden of persistently high inflation. Detmeister said the changes to the three components did not seem unusual in themselves, but added: "It does make you wonder why these particular items were chosen."


kate01@heraldcorp.com