Fed’s preferred measure of inflation dips to 3.4 percent in August

The Federal Reserve’s preferred measure of inflation dipped in August, as multiple central bank officials have said future interest rate hikes could be on the horizon .

The personal consumption expenditures (PCE) price index rose 0.3 percent from July to August and was up 3.4 percent year over year, according to data released Wednesday by the Bureau of Economic Analysis (BEA)

Excluding more volatile food and energy prices, annual inflation in August was at 3 percent, the PCE data shows. Food and energy prices rose by 0.2 percent from July to August, after increasing by 0.1 percent from June to July.

Changes to the BEA’s methodology for calculating the PCE index took effect on Wednesday. The bureau altered how it calculated spending on portfolio management, legal services and computer software, although it is unclear how those tweaks impacted the latest PCE data.

The latest inflation measurements were below projections from the Federal Reserve Bank of Cleveland, which estimated annual prices would be up by 3.7 percent year over year in August. The Cleveland Fed also projected core inflation, which excludes food and energy, at 3.4 percent.

The popular inflation metric measured prices as being up 3.7 percent in July, the same as June. Inflation has remained above the Fed’s 2 percent target for more than five years, rising this year amid the Iran war .

Despite the decline in PCE inflation, Navy Federal Credit Union chief economist Heather Long said the data “confirm progress on cooling inflation has stalled.”

Long wrote Wednesday on the social platform X, “The trend line is clear: Inflation — even Core PCE — remains stuck at 3% (or more). Annual revisions made the numbers look a little cooler, but it didn’t change the trend.”

Robin Brooks, a senior fellow at the Brookings Institution, argued otherwise, writing on X the “dovish” PCE reading takes an October interest rate hike by the Fed “off the table.”

Annual inflation as measured by the consumer price index was also 3.4 percent in August.

In response to persistent inflation, the Federal Open Market Committee (FOMC) raised interest rates by a quarter point earlier this month — to a range of 3.75 percent to 4 percent.

“The plain fact is that inflation is too high and has been for too long,” Fed Chair Kevin Warsh said after the unanimous vote to raise rates . “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”

Since that decision , multiple FOMC officials have forecast future rate hikes, with the panel set to meet again Oct. 27-28.

Anna Paulson, president of the Federal Reserve Bank of Philadelphia, said last Thursday economic conditions warrant “modest further tightening” if they continue.

Fed board member Michael Barr also said last week that “further policy adjustments” are likely needed to bring inflation down, remarks he reiterated on Tuesday.

“Risks to achieving our inflation target have increased, while risks to the labor market have receded, so we need to recalibrate policy to get us in a better position that more evenly balances risks to both components of our dual mandate,” Barr said at the Detroit Economic Club .

Traders are pricing in a 47.1 percent chance of the FOMC hiking rates by a quarter point in late October, according to the CME FedWatch tool .

John Williams, the president of the Federal Reserve Bank of New York, said Tuesday the central bank should continue to evaluate economic data before deciding whether to hike rates again.

“With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information,” Williams remarked at the University of Buffalo .

The New York Fed president noted that “one further upward adjustment” of the federal funds range may be needed this year if the economy “evolves in a manner broadly consistent” with his expectations.

After its meeting in late October, the FOMC will gather again in early December before the calendar shifts to 2027.