August PCE Inflation Holds at 3.4% as Core 3.0% Undercuts Forecasts After Downward Revisions

The Commerce Department said the PCE price index, the Federal Reserve's preferred inflation gauge, rose 0.3% in August and 3.4% from a year earlier. Excluding food and energy, core prices rose 0.2% on the month and 3.0% on the year. Both annual readings came in below consensus estimates of 3.7% and 3.3%, and the core figure fell below the entire range of 51 Bloomberg forecasts, which ran from 3.1% to 3.5%.

The surprise owes more to revisions than to August itself. The release folded in the annual update of the national accounts, and July's headline and core inflation were each revised down by about 30 basis points; July's core rate now stands at 2.98% year over year, down from 3.34%. Measured against those revised numbers, the annual rates were flat rather than falling. The monthly readings were still a touch soft: core rose 0.247% against an expected 0.27%, and headline rose 0.3% against a 0.4% estimate.

The trend picture is mixed. Core momentum looks calmer, with a three-month annualized rate of 2.05% and a six-month rate of 2.74%. Headline inflation is running hotter: its six-month annualized rate rose to 3.6% from 3.3% in the prior six months and 2.3% a year earlier. Consumers kept spending, with outlays up 0.9% in August against a 0.2% gain in personal income, which pushed the saving rate down to 4.1%.

For a Fed weighing further rate increases, the core undershoot argues for patience, and market pricing had the odds of an October hike below 40%. The next test is the September report due October 29: whether the lower, revised core path holds, and whether strong spending keeps headline inflation elevated.