The consensus read on today’s Bureau of Economic Analysis revisions is that the PCE inflation methodology changes brought welcome relief, shaving basis points off the numbers the Fed watches most closely. What the headline version leaves out is that after all the trimming, inflation is still running well above target, has been accelerating since April 2025, and the Fed has already cut rates three times in that same window.
What the PCE Inflation Methodology Changes Actually Did
The BEA’s annual revision exercise covers five years of historical data, but this cycle was different in one respect: three subcategories also received outright methodological changes. Two of those subcategories sit within the core services index, portfolio management and investment advice services, and legal services. The third sits within core goods: computer software and accessories.
The effect on core services was a reduction of 34 basis points for July, pulling the year-over-year rate from the originally reported +3.69% to a revised +3.35%. August came in at the same +3.35% under the new methodology. Core services account for over 60% of consumer spending, covering housing, healthcare, travel, insurance, transport, financial services and a range of other categories, so even a modest methodological shift in this bucket moves the aggregate numbers.
The computer software and accessories subindex produced the more arresting revision. Under the old methodology, that subindex had registered a year-over-year increase of 21.2% in July, driven by what Wolf Street described as side-effects of the AI investment boom. The new methodology placed that same July figure at +12.3%, still a rapid clip, but considerably less alarming in isolation. The practical consequence for the core goods PCE was a 43 basis-point reduction in July’s year-over-year rate, from +2.28% to +1.85%. August core goods came in at +1.97%.
Above Target, and Moving in the Wrong Direction
Here is where the popular framing starts to come apart. Strip out the methodological noise and the underlying picture is not one of disinflation on track. The revised core PCE price index stands at 3.01% year-over-year for August, and the all-items PCE price index accelerated to 3.42% in August from a revised 3.36% in July. Both figures are substantially above the Fed’s 2% target.
The core PCE price index has been above that 2% target since March 2021. The closest it got to target under the new methodology was +2.6% in April 2025. Since that point, it has moved away from target, not towards it. The all-items index reinforces the same picture: July’s month-to-month increase was cut by the revision to just +0.05%, but August’s came in at +0.31%, a meaningful acceleration in a single month.
Energy and food were untouched by the revisions. The energy PCE price index spiked 16.8% year-over-year in August, with the gasoline subindex up 27.8%. The food and beverage index rose 1.9% year-over-year. These components sit outside the “core” measure, but they matter to anyone filling a tank or a shopping trolley.
The month-to-month core PCE figure for July also deserves a second look. The original reading of +0.25% was cut in half by the revision to +0.12%, which sounds like a meaningful downgrade. August, however, reverted almost entirely to the old pace at +0.25% month-to-month. One revised month does not a trend make.
The methodological overhaul may well be statistically defensible. Changing how portfolio management fees and software prices are measured can legitimately alter the index level. But the consensus response, treating the basis-point reductions as evidence that inflation is closer to solved than the old data suggested, may be overweighting the revision and underweighting the direction of travel since April 2025.
According to ETF Trends, the revised methodology is scheduled for formal incorporation in the 30 September PCE release. That gives markets a concrete date on which to assess whether the new framework continues to show inflation drifting higher, or whether August was a one-month aberration. The Fed, which has already cut rates three times since inflation began moving away from target, will have a fresh read to reconcile with a policy path that the current data does not obviously support.
