The Federal Reserve’s preferred inflation gauge showed little progress in August, a trend that is expected to keep the central bank on course for upcoming interest rate cuts.
The Commerce Department reported Friday that the core personal consumption expenditures (PCE) price index rose 2.9% from a year earlier, unchanged from July and in line with market expectations.
The monthly gain was 0.2%. The broader PCE index, which includes food and energy, advanced 0.3% in August and 2.7% year over year, up slightly from 2.6% in July.
The figures reinforce the picture of inflation that has eased from its 2022 peaks but remains stubbornly above the Fed’s 2% target.
Economists said the data came as no surprise, but highlighted the challenge facing policymakers as they weigh inflation risks against signs of labor market weakness.
Market reaction was mixed, with stock futures edging higher.
Gains were tempered, however, by Thursday’s solid jobs data and an upward revision to second-quarter GDP growth to 3.8%, which cooled some of the bullish mood.
Investors worry that fewer jobless claims may signal underlying economic strength, reducing pressure on the Federal Reserve to cut rates further.
Fed cautious after first rate cut
The latest inflation release comes on the heels of the Fed’s first rate cut of the year.
Last week, officials lowered the benchmark federal funds rate by 25 basis points, bringing it to a range of 4.00 to 4.25%.
Chair Jerome Powell underscored the complexity of the current policy environment in remarks this week, saying “near-term risks to inflation are tilted to the upside and risks to employment to the downside.”
Analysts say the combination of sticky inflation and softening job growth will likely keep the Fed on guard, even as markets expect further rate cuts before year-end.
Consumer spending shows resilience
The report also highlighted the resilience of US consumers.
Household outlays rose 0.6% in August, exceeding the 0.5% pace forecast by economists and accelerating from the previous month’s gain.
The Bureau of Economic Analysis said spending remains the main driver of growth, accounting for more than two-thirds of economic activity.
Despite a labor market that has slowed notably in recent months, spending has continued to rise, supported by high-income households benefiting from stock market gains and strong housing values.
Federal Reserve data this month showed household wealth climbing to a record $176.3 trillion in the second quarter.
Ryan Sweet, chief US economist at Oxford Economics, warned that such reliance on wealth effects introduces vulnerabilities.
“Wealth effects have become more potent for consumer spending, a positive when stock and house prices are rising, but a risk if, and when, they sputter,” he said.
Uneven impact across households
While affluent households are sustaining demand, lower-income families are facing pressure from higher prices and reduced federal support.
Cuts to food assistance programs are set to weigh further on this segment, which is already contending with higher import costs tied to tariffs.
Economists say this divergence between income groups is likely to shape consumption trends heading into the final quarter of the year.
Spending growth is expected to slow sharply, particularly if financial markets lose momentum or housing activity weakens.
Growth outlook moderates
Strong consumer demand helped lift gross domestic product by 3.8% at an annualized rate in the second quarter, the fastest pace in nearly two years.
Growth projections for the third quarter, however, are moderating toward 2.5%, reflecting expectations that higher prices and policy uncertainty will begin to weigh on household budgets.
Inflationary pressures tied to President Donald Trump’s tariff measures have been slow to surface, as businesses initially leaned on inventories and absorbed costs.
But analysts warn that the effects could become more pronounced later this year, adding to the strain on consumers and complicating the Fed’s efforts to steer the economy toward a soft landing.
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