TLDR
- Core PCE inflation dropped to 3% in August, below the 3.3% forecast and down from July’s reading.
- Headline PCE rose 3.4% year over year, cooler than the expected 3.7%.
- The Bureau of Economic Analysis revised its methodology for software, legal fees, and investment advice costs, lowering the inflation figure.
- Markets now see a 35% chance of an October rate hike, down sharply from earlier in the week.
- New York Fed President John Williams said there is “no need for urgency” on rate hikes.
Inflation cooled more than expected in August, according to data released Wednesday by the Bureau of Economic Analysis. The report tracks the Personal Consumption Expenditures Index, which is the Federal Reserve’s preferred measure of price changes.
US 🇺🇸 PCE / GDP DATA:
Core PCE YoY: 3.0% (Est. 3.3%, Prior 3.3%)
Core PCE MoM: 0.2% (Est. 0.3%, Prior 0.2%)PCE YoY: 3.4% (Est. 3.7%, Prior 3.7%)
PCE MoM: 0.3% (Est. 0.3%, Prior 0.2%)Q2 Final GDP: 2.2% (Est. 1.5%)
Advance Goods Trade Balance: -$132.6B (Est. -$115B, Prior…
— Wall St Engine (@wallstengine) September 30, 2026
Core PCE, which excludes food and energy prices, rose 3% compared to a year earlier. That is down from 3.3% in July and below the 3.3% economists had expected.
Month over month, core PCE increased 0.2%. That matched July’s pace but came in below forecasts calling for a 0.3% rise.
Headline PCE, which includes food and energy, climbed 3.4% year over year. That is lower than July’s 3.7% reading.
Why the Numbers Came In Lower
Part of the drop is tied to a change in how the government calculates certain costs. The Bureau of Economic Analysis updated its approach for computer software, legal fees, and investment advice.
The change was applied retroactively back to 2021. Two of the affected categories, software and investment advice, had seen sharp price increases over the past year.
Capital Economics economist Stephen Brown said the revisions removed about 0.3 percentage points from the overall core inflation rate. He also said the three month annualized core inflation rate now stands at exactly 2%, matching the Fed’s target.
“Core price pressures are slightly less firm than feared and provide some support to our view that the Fed will pause in October,” Brown said.
What This Means for the Fed’s Next Move
The cooler reading is likely to ease pressure on the Federal Reserve to raise interest rates again next month. New York Fed President John Williams spoke Tuesday in Buffalo, ahead of the report’s release.
Williams said he sees “no need for urgency” when it comes to raising rates. He added that the Fed has time to collect more data before making a decision.
He said he expects one more rate hike before the end of the year. That timeline points more toward December than the Fed’s October meeting.
Following his comments, traders lowered their expectations for an October hike. According to CME Futures, the odds fell to about 35%, down from 50% on Tuesday and around 70% earlier in the week.
Not every Fed official is convinced the trend is solid. Fed Governor Michael Barr said Tuesday that only two of the past 20 months have shown core PCE consistent with the 2% target.
“I don’t yet see a clear trend toward a timely return to 2 percent,” Barr said. Wednesday’s report would mark a third data point toward that trend.
Barr pointed to higher energy prices and the buildout of AI infrastructure as factors keeping inflation elevated. He said tariff effects have faded, but energy costs remain high.
He also noted uncertainty tied to the Iran war and its impact on energy prices. Barr said investment and demand tied to AI are having a measurable effect on overall prices.
The government also released its third estimate of second quarter GDP growth on Wednesday. The economy grew at a 2.2% annual rate, up from the previous estimate of 1.5%.
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