Americans got some welcome news on inflation Wednesday, but it doesn’t mean the prices they pay at the grocery store, gas station or anywhere else are likely to fall.
The Commerce Department reported Wednesday the Personal Consumption Expenditures price index, the Federal Reserve’s preferred inflation measure known as the PCE, rose 0.3% in August and 3.4% from a year earlier.
This was better than expected. Economists surveyed by Reuters had projected a 0.4% monthly increase.
Even more encouraging for the Fed, so-called core PCE inflation — which strips out volatile food and energy prices — rose just 0.2% for the month and 3.0% over the past year.
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The government also sharply revised down its July inflation readings. Headline PCE inflation for July was cut to 3.4% from the previously reported 3.7%, while core inflation was revised to 3.0% from 3.3%. The revisions were part of an annual update that included changes in how the government calculates prices for several categories of goods and services.
While inflation remains well above the Fed’s target of 2%, Wednesday’s report suggests that price pressures are not as severe as previously thought.
Effect on interest rates
In an effort to rein in stubbornly high inflation, the Fed raised its benchmark interest rate earlier this month by a quarter percentage point to a range of 3.75% to 4%. It was the first increase in three years.
Fed officials also signaled that they might increase rates at least once more in 2026 and projected a benchmark rate of 4.1% by the year’s end.
But Wednesday’s softer-than-expected inflation report gives policymakers another reason to wait before raising rates again.
Financial markets had already scaled back expectations for an October rate increase after New York Fed President John Williams said Tuesday there was “no urgency” to move rates again.
Wednesday’s inflation report pushed those expectations down further.
Traders put the probability of an October increase at about 35%-38% after the report, down from roughly 52% beforehand and 70% on Monday, according to CME FedWatch data.
That does not mean the Fed is likely to cut rates, since inflation remains well above its target.
Nor does cooling inflation mean that prices are going down. It just means that they are rising at a slower rate.
Why ‘core inflation’ excludes food and gas
Wednesday’s report comes as Americans continue to pay more at the grocery store and the gas pump, and those price pressures are unlikely to change anytime soon.
Headline PCE measures price changes across a broad range of household spending. But it is a broader measure than the more familiar Consumer Price Index, or CPI, which measures the changing costs of baskets of goods.
In addition to consumer purchases, PCE also reflects some purchases made on behalf of households, such as healthcare paid for by employers or government programs. It also adjusts its spending weights more readily when consumers change what they buy as relative prices change.
Core PCE, a measure the Fed watches closely for signs of underlying inflation, can feel even more disconnected from everyday inflation pain because it excludes two categories that loom large in household budgets: food and energy.
The Fed uses core PCE because food and energy prices can swing sharply due to weather, global conflicts and oil supply disruptions. Those categories can obscure the longer-term inflation trend the Fed is trying to influence.
So while cooling core inflation may give the Fed less reason to raise interest rates, it does not necessarily mean Americans are getting relief from the high prices they pay for everyday needs.
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