Inflation Cools but Remains Elevated
The Commerce Department reported Wednesday that the personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, rose 0.3% in August from the prior month and 3.4% from a year earlier. Both figures were below the forecasts of economists surveyed by LSEG, who had expected 0.4% and 3.7%. Core PCE, which strips out volatile food and energy prices, increased 0.2% monthly and 3% annually, also cooler than the anticipated 0.3% and 3.3%.[S1]
The annual readings were unchanged from July's revised levels, after the Bureau of Economic Analysis adjusted its methodology for measuring prices in several categories, including legal services, software, computer accessories, and portfolio management. Those revisions lowered July's headline PCE from 3.7% to 3.4% and core PCE from 3.3% to 3%. Goods prices climbed 2.7% year over year after a 0.3% monthly rise, while services prices were up 2.5% annually following a 0.3% monthly increase.[S1][S2]
The personal savings rate slipped to 4.1% of disposable income in August from 4.6% in July. Since the start of 2025, the savings rate has fallen from a peak of 6.2% in April and began the year at 5.6%. Personal income rose 0.2% while spending increased 0.9%, compared with consensus forecasts of 0.4% and 0.8%. Energy costs drove much of the August price increase, with gasoline jumping 4.4%, transportation services accelerating 1.4%, and energy goods and services climbing 2.3%.[S1][S2]
What It Means for the Fed and Markets
The Federal Reserve raised interest rates earlier this month for the first time in three years, lifting the benchmark federal funds rate by 25 basis points to a target range of 3.75% to 4%. Following the inflation report, the CME FedWatch tool showed a 65.1% probability that the Fed holds rates steady at its October meeting, with a 34.9% chance of another 25-basis-point hike. A day earlier, those odds were nearly even, and a week ago the tool indicated a 70.9% chance of an October increase.[S1]
Equity futures rose following the release, while Treasury yields slipped into negative territory, as investors reduced the odds of an October rate increase and shifted their next expected hike to December. Headline and core PCE both stay well above the central bank's 2% goal, which leaves open the chance that the Fed adds another increase after September's move at one of its two remaining meetings this year — October, or more probably December.[S2]
Economists See Mixed Signals
Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, called the August PCE figures mixed, saying monthly inflation held steady while the trend was revised down. He said price growth now sits somewhat nearer target than in the previous report, though that stems from measurement changes rather than the underlying direction, and the gap between 3% core PCE and the 2% goal is plain. For the Fed, he framed the report as a glass half empty: the trend is lower but still far from target and not improving.[S1]
Bret Kenwell, U.S. investment analyst at eToro, said the softer-than-anticipated inflation reading should bring relief to Wall Street, particularly for investors hoping the recent climb in Treasury yields eases and bets on a Fed hike next month recede. He said the fight against inflation is far from finished but described the data as movement in the right direction, adding that a solid drop in oil prices would relieve price pressure, while attention stays fixed on Treasury yields, which have jumped over the past month even as stocks have held up fairly well.[S1]
David Russell, global head of market strategy at TradeStation, called the report welcome news for investors uneasy about the sharp rise in bond yields and said it strengthens the argument against an October hike, though he noted the data is somewhat dated and predates this month's jump in diesel prices. Sonu Varghese, global macro strategist at Carson Group, said PCE inflation still looks hot by any measure even after major methodology revisions, and with the economy strong and policy still accommodative, the Fed must judge how much tightening is warranted — a tailwind for stocks entering the fourth quarter. Heather Long, chief economist at Navy Federal Credit Union, said the PCE figures show no inflation progress in August and that a higher September reading is unavoidable, while households continue to feel stretched.[S2]
