PCE inflation, the Federal Reserve’s preferred measure of price growth, rose 3.4% through August, according to data released September 30 by the Commerce Department. The reading came in below economists’ forecasts and matched a newly revised July figure. Core prices, which exclude food and energy, rose 3.0%. The report arrives four weeks before the Fed’s next policy meeting, as policymakers weigh whether one more rate increase is needed this year.
What the August PCE Inflation Report Showed
The personal consumption expenditures (PCE) price index rose 0.3% in August from July, and the core index rose 0.2%, the Bureau of Economic Analysis reported. Economists surveyed by LSEG had expected monthly gains of 0.4% for headline prices and 0.3% for core prices, with annual rates of 3.7% and 3.3%.
The same release covered household income and spending. Consumer spending rose 0.9% in August, its strongest monthly gain in more than a year. Personal income rose 0.2%, while disposable income rose 0.3%. Because spending grew faster than income, the personal saving rate fell to 4.1% from 4.6% in July.
Households are spending faster than their incomes are growing and covering the gap with savings. That level of demand can keep upward pressure on prices even when the monthly inflation number looks calmer.
Why the Numbers Were Revised Lower
The softer annual figures owe much to a technical change rather than a sudden cooling in prices. The September 30 release incorporated the BEA’s annual update of the national accounts, with revisions reaching back to January 2021. As part of that update, July’s headline PCE inflation rate was revised to 3.4% from 3.7%, and core inflation to 3.0% from 3.3%.
According to coverage by American Banker and Benzinga, the revisions mainly reflect changes in how the agency measures certain services, including computer software, financial services fees, insurance, and portfolio management. Some of these categories rely on imputed prices rather than prices consumers directly pay. Michael Pearce of Oxford Economics noted that Fed officials had likely anticipated the adjustment.
A revision changes the measured level of inflation, but it does not show that price pressures are fading faster than previously thought. The August monthly gains of 0.3% for headline prices and 0.2% for core prices still annualize to rates above the Fed’s 2% target.
What PCE Inflation Means for the Fed’s Next Move
The Fed raised its benchmark rate by a quarter point on September 16 to a range of 3.75% to 4.00%, its first increase since 2023. Policymakers’ projections at that meeting pointed to one more increase before year end. New York Fed President John Williams has publicly said a further upward adjustment may be appropriate late this year.
The August report shifted market expectations. CME FedWatch data showed the probability of a hike at the October 27 to 28 meeting fell to roughly 35% to 37% after the release, down from about 71% a week earlier, according to Fox Business and Benzinga.
Economists remain divided on how much weight the data deserves. Some, including Fed Governor Christopher Waller, have pointed out that imputed services prices can overstate underlying inflation, which suggests the true trend may be somewhat better than the headline. Others caution that the revisions do not change the core problem. As Bill Adams of Fifth Third Commercial Bank put it in published remarks, the gap between 3% core PCE inflation and the Fed’s 2% target remains wide. Peter Williams of 22V Research also advised against placing too much emphasis on a single print.
The Pressures Still Pushing Prices Up
Three forces continue to work against a quick return to target. Energy is the most visible. Brent crude rose to about $103.53 a barrel on September 30, and the ongoing conflict involving Iran has kept oil prices elevated, feeding into gasoline, transportation, and shipping costs.
Services inflation is another concern. According to Benzinga’s reporting, services prices excluding energy and housing rose 0.4% in August, up from 0.1% in July. This category is closely watched because it tends to track wages and cools more slowly than goods prices.
Borrowing costs add a further layer. The 10-year Treasury yield rose to about 5.29% on September 30, a level that pushes up mortgage, auto, and business loan rates. Higher yields can slow the economy over time, but they also reflect investor concern that inflation will stay above target for longer.
What It Means for Household Budgets
For households, the report offers modest relief rather than a turning point. Prices are rising 3.4% a year, well above the Fed’s 2% target, and the drop in the saving rate to 4.1% suggests some families are stretching budgets to keep up.
Borrowers with variable-rate debt, such as credit cards and home equity lines of credit, are most exposed to further Fed action. Those rates followed the Fed’s September rate hike higher and would likely rise again if the central bank moves in October or December. Savers, by contrast, continue to benefit from higher yields on savings accounts, money market funds, and certificates of deposit.
Whether the Fed holds or hikes, the broader picture is one of inflation that has stopped accelerating but has not yet made convincing progress toward 2%.
The Bottom Line on PCE Inflation
The August report shows PCE inflation steady at 3.4% and core inflation at 3.0%, lower than expected largely because of methodology revisions. The data reduced the odds of an October rate hike, but it did not resolve the Fed’s central problem of inflation running a full percentage point above target. The next test is the September PCE release. Along with oil prices and services inflation, it will shape whether policymakers raise rates again before year end.
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