US Economic Perspectives "BEA method changes should lower inflation" Detmeister

Research evidence excerpt

US Economic Perspectives "BEA method changes should lower inflation" Detmeister

ntributorstoheadlinePCEpriceinflation(andamongthetop4contributorstocorePCEinflation).) The other series (legal services) is not

currently a big driver of inflation, though that in part is the result of the BEA making an

unannounced, ad-hoc change that avoided a large increase in legal services in the

January PCE price data (which they did not acknowledge until after inflation watchers

pointed out the discrepancy).

2. The new methodologies are not clearly specified and therefore are more susceptible The new methodologies lack

to manipulation: The lack transparency on exactly how the new price series will be transparency

constructed reduces the ability of outside entities to both forecast and corroborate the

official inflation data. A lack of transparency in the construction of key parts of the

Federal Reserve's preferred inflation gauge is of particular concern.

Figure 1: Two of the three series where the source data will be changed are

among the top 5 contributors to headline PCE price inflation (and among the

top 4 contributors to core PCE inflation)

Two of the three serie s where the source

d ata will be changed are amo ng th e top

5 contributors to headline PCE p rice infl ation

( and among the top 4 contributors to core PC E inf latio n)

Source: BEA, UBS

Looking at each of the changes more closely suggests the portfolio management and

investment advice change is the most problematic and will have by far the biggest

impact on inflation measurement. Changes to legal services prices and software prices

1. In fact, this probably understates the case. The third largest series by contribution to core inflation over the past year is nonprofit hospital

prices.