The Government Got Inflation Wrong

What if inflation has been running lower than the number the Federal Reserve has been watching?

Recent research and upcoming methodology changes suggest that certain categories within the PCE inflation measure may have been overstating inflation.

And that matters because PCE is one of the key inflation measures the Federal Reserve watches when making decisions about interest rates.

In this week’s The Brief, Kenny Simpson breaks down:

• Why the inflation number may be overstated
• The difference between PCE and CPI
• What categories are creating the discrepancy
• How portfolio management fees are being measured
• How software and other services can affect the inflation calculation
• What changes are being made to the methodology
• How much core PCE could potentially change
• Why this matters to the Federal Reserve
• What it could mean for mortgage rates and interest rates

Kenny discusses research from the Cleveland Fed, San Francisco Fed, Federal Reserve Board staff and others that has examined these measurement issues.

But does this mean the Fed is suddenly going to start cutting rates?

Not necessarily.

There are still major factors affecting the rate outlook, including geopolitical uncertainty, the labor market, consumer spending, inflation and broader economic conditions.

The bigger question is this:

If inflation has been overstated, have interest rates been higher than they needed to be?

Watch the full episode for Kenny’s breakdown.