The Fed's favored inflation gauge is set for revision! Analysts: It may give Waller room to hold rates steady.

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The annual revision of the Federal Reserve’s preferred inflation indicator is about to begin. Preliminary estimates by economists suggest that this adjustment may lower core inflation data, adding a key weight to the balance of whether or not to raise interest rates this year.

On July 9, according to Bloomberg, the U.S. Bureau of Economic Analysis (BEA) plans to conduct an annual update of the Personal Consumption Expenditures (PCE) Price Index in September. Several economists have calculated the proposed revisions and believe that if these adjustments were applied to the latest data, the core PCE reading might drop by about 0.1 to 0.3 percentage points. Although the magnitude is limited, in the context of nearly evenly split opinions among Federal Reserve officials on whether to raise interest rates in 2026, this downward adjustment could be just enough to help the incoming Fed Chair Walsh and dovish officials maintain their stance to pause rate hikes.

Stephanie Roth, chief economist at Wolfe Research, pointed out that the basis for the Fed to keep interest rates unchanged has significantly strengthened. She believes that, besides the PCE revision plan, the recent pullback in oil prices and the possibility that the latest jobs report overestimates labor market momentum both provide further support for holding steady.

PCE Annual Revision Approaches, Markets Bet on Steady Rates

The U.S. Bureau of Economic Analysis (BEA) plans to release annual revised data for the PCE Price Index this September. Current data show that PCE rose 4.1% year over year in May, the highest since April 2023, and still far above the Fed’s 2% inflation target. Excluding food and energy, the core PCE rose 3.4% year over year, the benchmark inflation measure closely watched by policymakers.

Although the annual revision is unlikely to fundamentally change the overall inflation landscape, even a marginal downward adjustment could have a substantial impact on policy direction, given the intensifying divisions within the Fed. According to Bloomberg, Fed officials agreed at their June meeting that inflation risks remain tilted to the upside, but opinions were clearly split on whether another rate hike would be needed in 2026.

This subtle internal divide makes the timing of the September revision especially crucial. If the data indeed lead to a downward revision of core inflation readings as expected, it will provide Walsh and dovish officials with additional arguments to strengthen their stance of keeping rates unchanged, thereby resisting pressure for rate hikes in internal debates.

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