Core PCE cooled in August, but stubborn spending and a data caveat keep the Fed's next move uncertain
The Federal Reserve's preferred inflation measure surprised to the downside in August, but a methodological revision to the underlying data has raised serious questions about how much of the cooling is genuine.
Core personal consumption expenditures (PCE) rose 3.0% year over year in August, below the 3.3% consensus forecast from Dow Jones economists. The headline PCE index rose a seasonally adjusted 0.3% for the month, pushing the 12-month rate to 3.4%. Both annual figures came in under expectations.
The catch: the Bureau of Economic Analysis (BEA) simultaneously revised how it calculates prices for software, portfolio management fees, and legal services as part of an annual data update extending back to 2021.
The precise numerical impact of those changes on the headline and core figures has not been disclosed, leaving analysts unable to determine how much of the softer reading reflects genuine disinflation versus an accounting change.
"This is good news for investors worried about the recent surge in bond yields, and it bolsters the case for not hiking in October," said David Russell, global head of market strategy at TradeStation.
"However, it's also relatively old data at this point that doesn't reflect this month's surge in diesel prices."
What the numbers actually showed
Energy costs drove the monthly gains. Gasoline jumped 4.4%, transportation services climbed 1.4%, and energy goods and services overall rose 2.3%.
Both goods and services prices posted 0.3% monthly increases.
Personal income rose just 0.2%, while consumer spending — which accounts for more than two-thirds of US economic output — surged 0.9%, well above the 0.8% forecast and sharply higher than the downwardly revised 0.1% gain recorded in July.
Separately, the BEA released its final second-quarter gross domestic product estimate, revising growth sharply higher to an annualized 2.2%, up from the prior 1.5% reading, with stronger contributions from consumer and government spending as well as investment.
Real final sales to private domestic purchasers, a key gauge Fed officials use to assess underlying demand, rose 4.6%.
Lisa Cook of the Federal Reserve says AI-driven investment demand, rising energy costs and persistent inflation pressures could delay a return to the Fed's 2% inflation target, reinforcing the possibility of an extended higher-rate environment.https://t.co/jTfMXg5r1F
— Mortgage Professional America Magazine (@MPAMagazineUS) September 29, 2026
What it means for the Fed and mortgage rates
The softer core print reduced the probability of an October hike, while a pause heading into fall had been the market's working assumption.
But the report does not clear a path to rate cuts. Headline PCE at 3.4% and core at 3.0% both remain well above the Fed's 2% target. The 0.9% consumer spending surge underscores that demand is not softening quickly enough to warrant policy relief.
Markets have shifted the next potential hike call to December, but brokers following mortgage rate expectations for the year ahead should note that one hot September inflation print could move that timeline forward.
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