Why Inflation May Suddenly Look Better Even Though Everything Still Costs More
The Bureau of Economic Analysis (BEA) is updating how it calculates the Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge. The revisions, applied retroactively over five years, are expected to lower reported core PCE inflation by about 0.2 percentage points after September 2026. Key changes include separating computer software from hardware costs (lowering readings), adjusting investment management fees to reflect services rather than asset values (lowering readings), and shifting legal services to Producer Price Index data (slightly raising readings). While the changes may make inflation appear cooler and could reinforce Fed rate-cut expectations, boosting rate-sensitive sectors like technology and housing, they do not reduce actual consumer prices. Inflation remains above the Fed's 2% target, and pre-pandemic price levels will not return.
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