Essentially, all models are wrong, but some are useful. – George E.P. Box, British statistician and pioneer in statistical modeling
Essentially, all models are wrong, but some are useful.
Inflation is measured through calculations and methodological choices that influence the reported rate. The Bureau of Economic Analysis (BEA) recently revised the Personal Consumption Expenditures (PCE) Price Index, lowering July core inflation 36 basis points (bps) to 2.98% from 3.34%. The BEA’s revisions extended back five years to the first quarter of 2021, while the 36-bp adjustment, the largest in recent history, has changed the inflation picture at a time when the Federal Reserve remains focused on price stability.
The BEA changed how it measures inflation in three categories: portfolio management services, computer software and accessories, and legal services. For portfolio management, the agency replaced a producer price index with an indirect calculation based on spending and estimated service volumes derived from industry employment and hours worked. The resulting inflation estimate for July fell from 20.6% to 8.6% year-over-year, according to Barclays, reducing aggregate core PCE inflation by approximately 0.2 percentage points. A separate change to the measurement of computer software and accessories incorporated producer prices alongside consumer prices, reducing reported inflation from 21.2% to 15.6% and lowering core PCE by an additional 0.1 percentage point. Neither change altered the prices that consumers actually paid. Both changed how those prices were measured, substantially lowering reported inflation.
Lower reported inflation can also influence monetary policy expectations and government financing costs. Core PCE is closely watched by the Fed, and a lower reading can reduce market expectations for additional tightening. Softer rate expectations, in turn, can put downward pressure on U.S. Treasury yields. Any resulting decline in Treasury Department borrowing costs would benefit a federal government already facing substantial financing needs and rising interest expenses.
Inflation data is never truly set in stone. The BEA periodically revises its calculations with the stated objective of improving accuracy as new information becomes available. Those revisions also involve methodological judgments that can materially affect reported inflation.
Today’s revised data becomes tomorrow’s historical record. Investors might eventually forget the original figures, even though those numbers informed economic and monetary policy decisions at the time. A methodological revision is not new disinflation, and lower reported inflation does not mean consumers paid lower prices. Future investors examining inflation in 2026 will encounter the revised figures as though they had always been reported. The original readings will survive in archived releases, but few will think to look for them.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
