These downward revisions are mainly the result of downward revisions to the price of financial services. In the previously published price index, increases in interest rate spreads caused by mounting credit losses to banks during the recession were being captured in BEA’s measure of the price of financial services, causing inflation to be overstated in 2007-2010.
The revisions were to specific components of financial services, the price and value of financial services furnished without payment. They are primarily due to an improvement made in the 2013 comprehensive revision of the NIPAs to measure implicitly priced borrower services more accurately. Interest that must be set aside to cover losses from defaults is not available to the bank to pay for costs of providing services. To account for this, BEA modified its measure of borrower services to remove expected default costs.
In 2007 rising losses on subprime mortgages began to cause turmoil in financial markets. By the end of that year the economy had entered a recession, and in 2008 the financial crisis occurred. Default losses on loans and credit cards rose rapidly from 2007 to 2010. The expected default costs that are excluded from the revised measures of implicitly priced commercial bank services also rose in 2007-2010, resulting in downward revisions to the price for implicitly priced bank services and the overall PCE price index. For more details on changes in methods for measuring implicitly priced services of commercial banks, see "Measuring the Services of Commercial Banks in the National Income and Products Accounts: Changes in Concepts and Methods in the 2013 Comprehensive Revision" in the February 2013 Survey of Current Business.