Fed's Waller Flags PCE Data Revision That Could Lower Inflation Reading

An upcoming statistical revision to the Personal Consumption Expenditures (PCE) price index could artificially lower the inflation reading, Federal Reserve Governor Christopher Waller noted recently, creating a complex backdrop for the central bank's September policy meeting.

A Statistical Mismatch

The U.S. Bureau of Economic Analysis (BEA) is scheduled to release its annual update with revised PCE data on September 30. This update includes a new methodology for calculating the cost of portfolio management services. Governor Waller stated this specific change could potentially reduce the 12-month PCE inflation rate by several tenths of a percentage point.

This creates a significant timing issue for policymakers. The Federal Open Market Committee (FOMC) will make its next interest rate decision on September 16, two weeks before the revised PCE data is published. The committee's decision will instead rely on earlier data points, including the Consumer Price Index (CPI) report set for release on September 11.

Implications for Fed Policy

The discrepancy means the FOMC will be acting on inflation data that may soon be revised downward. While the methodological change to PCE will not affect the CPI data, the PCE index is the Federal Reserve's preferred gauge for its 2% long-term inflation target.

Waller offered a conditional outlook on his own vote, emphasizing it was not a formal committee statement. He indicated a willingness to hold the federal funds rate steady if August inflation data is favorable, but he might consider an increase if the data comes in too strong. This highlights the weight placed on the incoming CPI and Producer Price Index (PPI) figures ahead of the September 16 meeting.

Ad

Market Uncertainty and Key Dates

This sequence of events presents a dual challenge for investors and reshapes market pricing logic. A strong CPI report could increase expectations for a hawkish policy stance from the Fed on September 16, potentially weighing on risk assets, even if traders anticipate a subsequent downward revision in the PCE data.

Key dates for market participants include:

• September 11: August Consumer Price Index (CPI) data release.
• September 16: FOMC interest rate decision and press conference.
• September 30: Release of revised August PCE data.

While the September 30 data release cannot alter the policy decision already made, it will be crucial for shaping investor expectations about the persistence of inflation. A significantly lower revised PCE figure could bolster the case that price pressures are easing, but this effect may be limited if the broader inflation trend remains elevated.