The Federal Reserve's preferred inflation gauge came in cooler than Wall Street expected in August, handing bond investors a reprieve after a punishing week and complicating the case for another rate increase when policymakers meet in October.
The personal consumption expenditures price index rose 0.3% in August, the Bureau of Economic Analysis reported Wednesday at 8:30 a.m. ET, putting the 12-month increase at 3.4%. Economists surveyed by Dow Jones had penciled in a 3.7% annual rate.
Stripping out food and energy, the core measure that Fed officials watch most closely rose just 0.2% on the month for an annual rate of 3.0% — a full three-tenths below the 3.3% consensus.
A Methodology Change Did Some of the Work
Part of the improvement is statistical rather than economic. The BEA revised how it computes several components of the index going back to 2021, changing its price measurement for legal services, software and computer accessories, and portfolio management services.
The practical effect is that July's readings were revised lower by roughly two or three tenths of a percentage point. Core inflation had been reported at 3.3% for July under the old methodology; on the revised basis, August's 3.0% represents a flat month rather than a sharp deceleration.
That nuance matters for a central bank that raised its target range to 3.75%–4.00% on September 16 — its first hike since 2023 — explicitly on the argument that inflation was drifting away from the 2% goal. Inflation is still running well above that target on every measure in Wednesday's report.
Consumers Keep Spending Beyond Their Paychecks
The spending data told a less comfortable story. Personal income rose only 0.2% in August, missing the 0.4% estimate, while consumer spending jumped 0.9% against a 0.8% forecast and a revised 0.1% gain in July. Adjusted for inflation, real spending climbed 0.6%.
Households, in other words, are drawing down savings or leaning on credit to sustain a pace of consumption their incomes no longer support — a dynamic that can keep demand-driven price pressure alive even as the headline figures improve.
Markets Push the Next Hike to December
Equity futures firmed and Treasury yields fell on the release. The 30-year bond yield eased about four basis points to 5.553% after touching its highest level since 2002 on Tuesday, when it briefly topped 5.61% during a sixth straight session of selling. The 10-year note slipped to roughly 5.23%.
"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.
Futures markets, which had put the odds of an October increase near 70% before the release, trimmed those bets and shifted the expected next move toward the December 8–9 meeting. New York Fed President John Williams has said he sees no urgency to move again immediately, though 16 of 18 FOMC participants projected at least one more increase before year-end in the September dot plot.
"Given the mixed nature of the data, it shows that the Fed was probably correct in raising rates this month, but if the inflation data improves they might be able to skip a meeting," said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
The FOMC next meets October 27–28.
Sources: Bureau of Economic Analysis (Personal Income and Outlays, August 2026); CNBC; Fox Business; Investing.com; TradeStation; Northlight Asset Management.