Fed's preferred inflation gauge eases to 3.4% in August; core falls to 3.0%

U.S. inflation as measured by the Federal Reserve's preferred gauge came in lower than expected for August, according to data released on September 30, 2026, by the Bureau of Economic Analysis. The personal consumption expenditures (PCE) price index rose 3.4% from a year earlier, and 3.0% excluding food and energy.

The numbers

From July to August, the PCE price index increased 0.3%, and the core index, which excludes food and energy, increased 0.2%, the BEA said.

According to Yahoo Finance, economists had expected the headline annual rate to come in at 3.7% and core at 3.3%, with a 0.3% monthly increase in core. Core PCE inflation had been 3.3% in July, Yahoo Finance reported, so the August reading marked a notable step down.

The release also showed strong spending. Personal consumption expenditures increased $190.8 billion, or 0.9%, in August, made up of $114.1 billion more spending on goods and $76.7 billion more on services. Adjusted for inflation, spending rose 0.6%. Personal income increased $66.6 billion, or 0.2%, and disposable income rose 0.3%, but real disposable income was flat. The personal saving rate was 4.1%.

Revisions played a part

The BEA said the release incorporates its 2026 annual update of the national economic accounts, with revisions beginning in January 2021.

The Conference Board said the downward revisions were driven by changes in method. "The key reason for the downward revisions was methodological changes to calculations of portfolio management fees, and computer and software prices," wrote Yelena Shulyatyeva, senior U.S. economist at the Conference Board.

What it means for the Fed

The data arrived as investors debate whether the Federal Reserve will raise rates again in October. Reaction was mixed.

"Core price pressures are slightly less firm than feared and provide some support to our view that the Fed will pause in October," Stephen Brown of Capital Economics said, according to Yahoo Finance. Yahoo Finance reported that, according to CME futures, the market-implied probability of an October rate hike fell to about 35% after the release, from 50% the day before.

Fed Governor Michael Barr struck a more cautious tone, saying, "I don't yet see a clear trend toward a timely return to 2%," Yahoo Finance reported.

The Conference Board took a more hawkish view. "Strong consumer spending and a potential reacceleration of inflation, as energy supply shortages intensify heading into Q4, will likely keep the Fed on a tightening path later this year and possibly into 2027," Shulyatyeva wrote.

Why it matters

The PCE index is the inflation measure the Fed uses for its 2% target, and both the headline and core rates remain well above that goal. The softer-than-expected August reading lowered market odds of another hike in October, but part of the improvement came from revised measurement methods rather than cooler prices, and strong spending and high energy costs keep the risk of further rate increases in view.

Sources

This article was drafted with AI assistance and checked against the sources above. Company claims are reported as claims. Cover image is AI-generated.