Revisions to PCE Inflation Measures: Implications for Monetary Policy

Dean Croushore

Professor of Economics and Rigsby Fellow, University of Richmond and Visiting Scholar, Federal Reserve Bank of Philadelphia

May 2008

WP 08-08 – This paper examines the characteristics of the revisions to the inflation rate as measured by the personal consumption expenditures price index both including and excluding food and energy prices. These data series play a major role in the Federal Reserve's analysis of inflation.

The author examines the magnitude and patterns of revisions to both PCE inflation rates. The first question he poses is: What do data revisions look like? The author runs a variety of tests to see if the data revisions have desirable or exploitable properties. The second question he poses is related to the first: Can we forecast data revisions in real time? The answer is that it is possible to forecast revisions from the initial release to August of the following year. Generally, the initial release of inflation is too low and is likely to be revised up. Policymakers should account for this predictability in setting monetary policy.

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