The administration of U.S. President Donald Trump has decided to revise part of its inflation calculation methodology starting next month, altering some inflation figures. Wall Street expects that the numerical inflation readings will come down somewhat as the method for calculating the personal consumption expenditures (PCE) price index — the price gauge most closely watched by the U.S. central bank, the Federal Reserve — changes.
The problem is that hawkish voices favoring monetary tightening persist within the Fed, even though last month's consumer price index (CPI) and producer price index (PPI) came in more stable than expected. On top of this, since the 7th of this month, the United States and Iran have been engaged in armed conflict, setting aside their previous memorandum of understanding (MOU) to end fighting, sending international oil prices back into an unstable trend. In addition, the Trump administration's imposition of new tariffs on dozens of countries worldwide, including South Korea, based on Section 301 of the Trade Act, effective the 24th, is cited as another factor raising price uncertainty. This means that simply revising the PCE and other price calculation methods cannot predetermine the outcome of the Federal Open Market Committee (FOMC) regular meeting on the 28th and 29th.
U.S. Commerce Dept. Overhauls PCE Price Index... "Inflation Reading Likely to Come In 0.2 Points Lower Than Before"
The Wall Street Journal (WSJ) reported on the 19th that the U.S. Commerce Department has decided to overhaul some of the component items reflected in the PCE price index calculation. When deciding monetary policy, the Fed uses the core PCE price index, which excludes energy and food, as its most important reference. According to the WSJ, the U.S. Commerce Department's Bureau of Economic Analysis (BEA) is revising the measurement methods for calculating three sub-indexes: wealth management services, software, and legal services. The revamped method will be introduced starting with the August data to be released on September 30, and will be applied retroactively to data from the past five years.
In detail, the software segment will now be calculated by adding "video game software" and "web hosting" (the cost of renting internet servers) price data compiled by the Bureau of Labor Statistics (BLS) under the Labor Department. Wealth management services will also be changed from the current method, which tallies the total fees paid by individuals, to a complex method that compares the revenue and workload earned by the financial firm in question. Generally, when stock prices rise, wealth management fees also increase, and this measure reflects criticism that such increases should not be treated as price rises. In the case of legal services, since the Bureau of Labor Statistics has decided to no longer disclose this figure due to data collection issues, it will be replaced with the PPI rather than the CPI that had been used until now.
According to the WSJ, Wall Street experts expect that the revisions to wealth management services and software will have a downward effect on the PCE price index, while legal services will have an upward effect. Adding all of these together, they project that the PCE price index growth rate will fall by 0.2 percentage points overall.
Earlier, the May PCE price index released on the 25th of last month met expectations but still remained at a high level. According to the U.S. Commerce Department, the May all-items PCE price index rose 4.1% from a year earlier and 0.4% from the previous month. The core index, excluding volatile food and energy, rose 3.4% year-on-year and 0.3% month-on-month. The June PCE price index, for a month when international oil prices temporarily fell following the signing of the U.S.-Iran MOU to end fighting, will be released on the 30th of this month.
The argument that the price gauge referenced when deciding monetary policy should be revised has already been raised within the Fed. Chairman Kevin Warsh, when he was a nominee, foreshadowed at his confirmation hearing before the Senate Banking Committee on April 21 that he would gauge the economy's underlying inflation using a "trimmed mean" price gauge rather than the core PCE price index going forward. The trimmed mean price gauge mentioned by incoming Chairman Warsh is a PCE index calculated by removing the bottom 24% and top 31% portions and taking the weighted average of the remainder. In this case, items with high volatility would be largely excluded, bringing the nominal inflation rate level down to the low 2% range.
In fact, on the 9th of this month, the Fed formed a task force (TF) on the inflation framework, along with communication, the balance sheet, data source utilization, and productivity and jobs. Many prominent figures from academia and business joined, including Harvard University economics professor Gregory Mankiw — author of the global bestseller "Mankiw's Economics" and chairman of the White House Council of Economic Advisers (CEA) under the George W. Bush administration from 2003 to 2005 — New York University economics professor Thomas Sargent, who won the Nobel Prize in Economics in 2011 for research on causality in macroeconomics, former Walmart CEO Doug McMillon, renowned venture investor Marc Andreessen, Stanford University economics professor Chad Jones, who collaborated with artificial intelligence (AI) firm Anthropic, and executives from Microsoft's (MS) Xbox division.
Kevin Warsh Also Reviews Price Framework... Fed Officials Pour Out Hawkish Remarks Despite June CPI, PPI Slowdown
Unlike the efforts of the Trump administration and the Fed to somewhat lower inflation figures by revising calculation methods, remarks expressing concern about price increases continue to pour out among monetary policy decision-makers. This is because Middle East conditions and tariff uncertainty still cast a dark shadow over the economy as a whole. According to Reuters and Bloomberg on the 16th, Dallas Federal Reserve Bank President Lorie Logan argued in a speech at an event held in Houston, Texas, that day: "If inflation does not come down to 2% on its own, some degree of policy tightening will be needed to reach the target." Logan was also one of the three who, at the FOMC meeting on April 28-29 this year, supported holding rates but dissented from the Fed statement that hinted at an easing stance.
Logan did not hide her wariness about the gasoline price drop and the price data slowdown that appeared following the entry into force of the U.S.-Iran MOU to end fighting on the 18th of last month. "One month of easing is not enough," she stressed, adding, "We must finish the mission of restoring price stability." She continued, "This requires the premise that there are no additional energy shocks in the short term and that demand pressures do not grow in the medium term, but at present this is closer to a hope than a possibility."
Kansas City Fed President Jeff Schmid also explained at an economic forum held in Nebraska that same day: "My main area of concern is inflation that is too hot," and "Because it has exceeded the target for too long, we continue to focus policy on inflation." Schmid also assessed that the better-than-expected June CPI and PPI figures were hard to view as a trend. His argument was that price pressures are appearing not only in energy but across goods and services as a whole, including food. Schmid pointed out in particular that food prices are rising faster than before the COVID-19 pandemic. "We have not yet reached the inflation level we want," Schmid said, noting, "The factors behind inflation include not only supply but also strong demand."
On the 14th, the U.S. Labor Department's Bureau of Labor Statistics announced that the June CPI rose 3.5% from June last year. This was a slowdown from the May growth rate of 4.2%, and lower than the 3.8% expert forecast compiled by Dow Jones. Compared with May, it fell 0.4%, also below the expert forecast of a 0.2% decline. The month-on-month decline was the largest in six years since the 0.8% drop in April 2020 during the COVID-19 pandemic. Core CPI rose 2.6% year-on-year, a slowdown from the May growth rate of 2.9%. The core price index growth rate also fell short of expert forecasts of 2.9% year-on-year and 0.2% month-on-month.
The June PPI, released on the 15th, also fell 0.3% from May, for the first time in 10 months since August last year.
