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US PCE Inflation Cools but Remains Above Target in August
Confirmed
In Short: The Federal Reserve's preferred inflation gauge showed a slight cooling in August but remained well above the central bank's 2% target.
The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, showed a slight cooling in August but remained well above the central bank's 2% target.
According to the Bureau of Economic Analysis, headline PCE rose 0.3% month-over-month in August and was up 3.4% from a year ago, while core PCE, which excludes volatile food and energy prices, increased 0.2% month-over-month and 3% year-over-year.
Scott Anderson, chief economist at BMO Capital Markets, noted that the August numbers are already somewhat outdated, as more recent data shows inflation pressures escalating into September.
Kevin Warsh, the Fed Chair, emphasized that inflation has been too high for too long, and at 3%, it still exceeds the central bank's target.
The BEA's annual benchmark revisions to PCE inflation data also adjusted July's readings, lowering headline PCE from 3.7% to 3.4% and core PCE from 3.3% to 3%.
These revisions reflect the ongoing challenges in managing inflation, particularly given the impact of the Middle East war on energy prices and the broader economic environment.
Despite the slight cooling, the data suggests that the Fed may still need to take further action to bring inflation back to its target.
Markets are currently expecting the Fed to raise interest rates in September, with the probability of a rate hike now above 60%.
Jai Kedia, a research fellow at the Cato Institute, believes a rate hike is likely given the positive signs in the labor market and stubbornly high inflation.
The BEA's report also showed that Personal Income rose by 0.2% on a monthly basis in August, while Personal Spending expanded by 0.9%.
What this adds
The August PCE data is already somewhat stale, as more recent data shows inflation pressures escalating into September.
The BEA's annual benchmark revisions to PCE inflation data have adjusted July's readings, lowering headline PCE from 3.7% to 3.4% and core PCE from 3.3% to 3%.
Background
The Fed’s preferred inflation gauge cooled more than expected but remained elevated well above target in August, as consumers continued to face price pressures.
What's confirmed
- AUD/USD is sitting at two-month lows near 0.6950 in the Asian session on Wednesday, as below-expectations August Australian underlying CPI data pours cold water on expectations for further RBA interest rate hikes.
- The United States (US) Bureau of Economic Analysis (BEA) will publish the Personal Consumption Expenditures (PCE) Price Index data for August on Wednesday at 12:30 GMT.
- Core prices, which exclude volatile food and energy prices, are forecast to have risen 3.3% over the year.
- According to July data, headline PCE rose 3.7% year-over-year in July, while core PCE climbed 3.3% year-over-year, both well above the Federal Reserve's 2% inflation target.
- August PCE inflation data, which will guide Federal Reserve monetary policy expectations and subsequent rate-hike probabilities.
- August PCE inflation data is about to be released, short-term market focus has shifted back to inflation and the Federal Reserve's subsequent rate-hike path.
- Markets currently expect both headline and core PCE to rise 0.3% month-over-month in August.
- Against the backdrop of the Federal Reserve's 25-basis-point rate hike in September, whether inflation remains sticky will directly influence market expectations regarding further rate hikes in October and by the end of the year.
What's still developing
- As previously noted, PCE inflation data is critical as it’s the Fed’s preferred inflation gauge and will help market participants move bets on whatever the central bank may do in the last two meetings of the year.
- Market participants closely watch the PCE Price Index because it is the Federal Reserve’s (Fed) preferred measure of inflation and could influence its policy outlook.
- The hike explains itself: the Middle East war maintains energy prices upward, pressuring the cost of living, while PCE inflation hit 4% in early 2026, doubling the central bank’s goal.
- Sure, inflationary pressures have receded from that level, but they are still far from the comfortable 2%.
- The Federal Reserve’s preferred measure of inflation probably stayed too hot for comfort in August, even before the latest surge in fuel prices.
- Lately, the two inflation measures have shown the same trend.
- Inflation has stayed stubbornly high due to the war in Iran pushing up gasoline and diesel prices; AI spending pushing up costs for electronics and some other products; and tariffs stoking price increases on just about everything else.
- The rate is expected to ease to 3.9% in 2028, also above the previous 3.4% projection.
- The longer-run rate rises to 3.2% from the previous 3.1%.
- For 2027, the US economy is expected to grow by 2.4%, up from the previous estimates of 2.3%.
- The unemployment rate is expected to be at 4.1% by the end of 2026, down from the previously estimated 4.3%.
- In 2027, PCE inflation is projected at 2.3%, matching June projections.