Core inflation remained largely unchanged in August, according to the Federal Reserve’s preferred gauge, keeping policymakers on track for further interest rate cuts. The personal consumption expenditures (PCE) price index showed moderate monthly increases, aligning with forecasts and reinforcing expectations of continued monetary easing before year-end.
Inflation and Spending Trends
The headline PCE index rose 0.3% in August, bringing annual inflation to 2.7%, a slight uptick from July’s 2.6%. Core PCE, which excludes food and energy, climbed 0.2% month-over-month and held steady at 2.9% year-over-year. Both figures matched consensus forecasts, suggesting inflationary pressures remain contained despite tariff-related concerns.
Consumer behavior continues to underpin economic resilience. Personal income advanced 0.4% for the month, while personal consumption expenditures grew at a stronger 0.6% pace, both slightly above expectations. The personal saving rate also improved, reaching 4.6%. Together, these data points highlight consumers’ ability to sustain spending even in the face of policy uncertainties.
Impact of Tariffs and Price Breakdown
President Donald Trump’s tariffs appear to have had limited impact on consumer prices. Companies have offset cost pressures through inventory management and internal absorption, limiting pass-through effects. Goods prices rose just 0.1% in August, while services increased 0.3%. Food and energy saw sharper gains of 0.5% and 0.8% respectively, with housing costs rising 0.4%. Fed officials, including Chair Jerome Powell, view tariffs as a one-time driver rather than a lasting inflationary force.
Federal Reserve Outlook
The Federal Reserve continues to target 2% inflation but remains encouraged by stable readings. Policymakers signaled expectations for two additional quarter-point rate cuts before year-end, following the recent reduction that lowered the federal funds target range to 4%-4.25%. Markets are pricing in a strong probability of an October rate cut, with mixed sentiment about another move in December.
While some policymakers remain cautious, the overall picture supports gradual easing. The combination of moderate inflation, resilient consumer spending, and limited tariff impact reinforces the Fed’s confidence in pursuing measured cuts to support growth.
Conclusion
August’s inflation and spending data confirm a steady economic backdrop in which consumers remain active and inflation pressures subdued. With PCE data aligning to forecasts and tariff impacts contained, the Federal Reserve is positioned to continue rate reductions, balancing growth support with its long-term inflation target.