Inflation Gauge Ticks Higher
The Commerce Department reported that the Federal Reserve’s preferred inflation measure, the personal consumption expenditures (PCE) price index, rose 2.7% in August compared with the previous year. This marked a slight increase from July’s 2.6% reading and represented the highest level since February.
Core PCE, which excludes volatile food and energy categories, rose 2.9% year-over-year, matching July’s pace and aligning with economists’ forecasts. On a monthly basis, prices climbed 0.3%, a notch higher than July’s 0.2% gain. Core prices advanced 0.2% month-to-month, unchanged from the prior report.
Consumer Spending and Income Trends
The report highlighted continued resilience in consumer spending, which grew 0.4% in August after adjusting for inflation. This mirrored July’s pace. The strength was driven largely by a 0.7% increase in goods spending, while services such as travel and dining out rose by a modest 0.2%.
Michael Pearce of Oxford Economics noted that strong consumer outlays are being supported disproportionately by higher-income households, raising concerns about sustainability.
On the income side, overall personal income rose 0.4% in August, consistent with July’s growth. Within that figure, income for business owners and the self-employed rose 0.9% for the second straight month, while wages and salaries climbed 0.3%, down from 0.5% previously.
Fed Policy Context
Although inflation has eased considerably since the Fed’s aggressive tightening campaign of 11 rate hikes in 2022 and 2023, price growth remains above the Fed’s 2% target. Policymakers continue to balance inflation concerns with evidence of a cooling labor market.
Earlier in September, the Fed cut its benchmark interest rate for the first time this year, citing signs of a weakening job market. Still, the central bank has been cautious with further cuts, wary of how President Donald Trump’s tariffs on imports could add to inflationary pressures.
Trump has been a vocal critic of the Fed, urging faster and deeper rate reductions and frequently attacking Fed Chair Jerome Powell. He also sought to remove board member Lisa Cook in a controversial move now pending before the Supreme Court.
Why the PCE Index Matters
The Fed favors the PCE price index over the more widely known consumer price index (CPI) because it adjusts for shifts in consumer behavior. For example, it accounts for households switching from brand-name products to store brands when prices rise. This broader approach provides policymakers with a more flexible and realistic gauge of inflationary trends.
With August’s uptick, the data underscores that while inflation is off its 2022 peak, it remains stubbornly above target, complicating the Fed’s path forward on monetary policy.
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