A Potentially Big Change in How Inflation Is Measured

The U.S. Bureau of Economic Analysis (BEA) is changing how the Personal Consumption Expenditures (PCE) index measures certain components of inflation.

Why does this matter?

Sometimes what looks like inflation really isn’t.

Here’s an example:

Imagine you have a financial advisor who charges a fee of 1% of your investment portfolio. If the stock market grows and your portfolio value increases, the dollar amount of the advisor’s fee also increases, even though the advisor is still charging the exact same 1%.

Under the current methodology, some increases like this can be reflected as higher prices, even though the percentage charged hasn’t changed. You’re paying the same rate; the underlying asset simply became more valuable.

The updated calculation is designed to remove more of these types of “false inflation” signals so the inflation data better reflects actual price changes rather than increases driven by higher asset values.

Why it matters:

The Federal Reserve pays close attention to PCE inflation when making interest rate decisions. If inflation is measured more accurately and comes in lower as a result, it could support a more favorable outlook for bonds and, ultimately, mortgage rates.

It’s too early to know the full impact, but this change has the potential to be meaningful for financial markets.

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