Warren presses Commerce on PCE changes shaving inflation 0.2 point

Sen. Elizabeth Warren demanded the Commerce Department explain planned changes to the Fed's preferred inflation gauge that could shave roughly 0.2 percentage point off measured price growth, escalating a political fight over the integrity of U.S. economic statistics.

"The Commerce Department and its statistical agency have an obligation to explain to the public the reasoning and process behind the decisions," Warren, a Massachusetts Democrat, wrote in a letter sent Thursday morning.

The Bureau of Economic Analysis will adopt new methods for measuring inflation in computer software, legal fees and investment advice starting with August data published Sept. 30. The PCE index showed inflation at 3.7 percent in June, or 3.3 percent excluding volatile food and energy prices — well above the Fed's 2 percent target.

The changes matter because the Fed consults PCE readings to set interest rates. Chairman Kevin Warsh has pledged to reduce inflation and suggested the central bank could reconsider which metrics belong on its inflation dashboard, a conversation that gains urgency as the September data update approaches.

Warren's letter cited a charged environment in which the Trump administration has politicized economic data. Trump fired the Bureau of Labor Statistics chief last year after unfavorable jobs numbers and disbanded expert committees that once advised agencies on methodological changes.

There is no evidence the coming changes are politically motivated. Economists following the revisions largely view them as defensible accuracy improvements. The BEA is led by Vipin Arora, a civil servant who started his job during the Biden administration.

The new approach changes how the BEA measures price changes in three categories. Computer software inflation will no longer be tied as closely to hardware prices, which have soared during the AI boom. The measured cost of investment advice won't climb in lockstep with the stock market as it does under the current system. Legal fees will also be measured differently.

Two of those categories — computer software and investment advice — have shown steep price increases over the past year, which some economists say have artificially boosted the overall inflation number. Even after the revision, inflation is likely to remain well above the Fed's target.

The PCE index differs from the consumer-price index, which is published independently by the Labor Department and tracks a narrower basket of goods. The Fed prefers PCE because it gauges inflation through a broader lens, pulling in healthcare costs that consumers don't pay directly, and because it accounts for how spending patterns shift as prices change.

Noise infusion ban draws separate scrutiny

Warren's letter also requested information on a separate Commerce Department change: a ban on using a statistical technique called "noise infusion" to protect respondents' data privacy. The ban affects other types of government data, including the decennial census. In some cases, Warren warned, the ban could prevent agencies from publishing highly detailed data such as local employment figures for specific industries.

The political scrutiny arrives as the Fed navigates a delicate policy path. Inflation has exceeded the 2 percent target since 2021, and Warsh has committed to reducing it. If the September data update shows cooler readings, markets may adjust expectations for the Fed's rate path — though the two-tenths adjustment is modest relative to the gap between current inflation and the target.

Market participants are already weighing the implications. Lower inflation readings could support scenarios where the Fed opts for a rate cut, though the revision's modest size limits its direct impact. Observers will watch how Warsh and other Fed officials respond to Warren's questions, and whether the September data update shifts the central bank's policy calculus.

A BEA spokeswoman declined to comment on Warren's letter. The agency has previously said the statistical tweaks are intended to improve accuracy.

This article is for informational purposes only and does not constitute investment advice.