08.28.2026
(NEVER)MIND THE GAP
The BEA planned methodological changes are likely to lower measured core PCE inflation and improve consistency between PCE and CPI inflation.
Since the start of the year, the markets and, more recently, the Fed have revised up their core PCE inflation forecasts far more aggressively than we have. Notably, these upward revisions have been disproportionately larger than those made to CPI forecasts, despite a much less pronounced upgrade to the growth outlook. In our view, this largely reflects expectations that the gap between core PCE and core CPI inflation would remain unusually wide.
We have never been convinced that such a large divergence was likely to persist. We believe that recent developments support our baseline. Specifically, the Bureau of Economic Analysis (BEA) has announced a set of methodological revisions to the National Economic Accounts that will affect the measurement of several components of PCE inflation.
The revisions will impact computer software and accessories, portfolio management and investment advisory services, and legal services, indeed the three categories within the core PCE basket that have increased disproportionally year-to-date.
In this note, we show that the planned methodological changes are likely to lower measured core PCE inflation and improve consistency between PCE and CPI inflation. As a result, the upcoming revisions should help reduce the unusually wide gap between the two inflation measures.
We are not changing our 2026 core PCE inflation forecast. This is because our baseline already incorporated the possibility of methodological revisions by the BEA. Historically, periods of unusually wide divergence between PCE and CPI inflation have tended to be followed by convergence toward their long-run relationship within a few quarters.
Against this backdrop, we continue to expect core PCE inflation to average 2.7% in 2026.
Matteo Gallone
Macroeconomist
Fabio Fois
Head of Investment Research & Advisory
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