The Commerce Department reported that the Fed's preferred inflation gauge, the personal consumption expenditures index, increased 0.3% in August and is up 3.4% from a year earlier. The monthly move lined up with the Dow Jones survey, while the yearly figure came in cooler than the 3.7% consensus. Stock market futures gained after the release, Treasury yields were negative, and futures pricing pushed the next probable Fed rate increase from October to December.
"However, it's also relatively old data at this point that doesn't reflect this month's surge in diesel prices."
Excluding food and energy, prices climbed 0.2% in August and 3.0% over the past year, both shy of the 0.3% and 3.3% forecasts. Those changes cut the July core PCE level by 0.36 percentage point. While the Fed's formal target is tied to the headline measure, officials typically watch core to assess the underlying trend.
Inflation is still running above the central bank's 2% goal, leaving room for another increase after September's hike, potentially in October or December. Policymakers can sometimes look past jumps tied to outside shocks such as tariffs or supply disruptions related to the war with Iran. Still, the stickiness of price pressures, plus uncertainties around the artificial intelligence breakout, have complicated the usual playbook.
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Energy did much of the lifting in August. Gasoline rose 4.4%, transportation services advanced 1.4%, and the broader energy goods and services category increased 2.3%. Prices for goods and services each rose 0.3%. The report also showed personal income up 0.2% and spending up 0.9%, versus expectations for 0.4% and 0.8%.
In other data, second quarter gross domestic product was finalized at a 2.2% annualized rate, up from the prior 1.5% estimate, reflecting stronger contributions from consumer and government spending along with investment. For April through June, inflation readings were trimmed, with headline PCE at 5.0% and core at 3.3%, both 0.3 percentage point below earlier estimates.
Before today, markets had been leaning toward an October follow up to the quarter point September hike. Then New York Fed President John Williams said Tuesday, "With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information," while adding another hike "may be appropriate late this year." The softer annual PCE readings reinforced that shift toward December.
Expect a choppier tape as each data point lands, and keep an eye on how fuel costs and demand hold up into fall - both are steering the rate path and your borrowing costs.
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