Inflation remains elevated, but still in line with expectations in August, according to the latest readings of the Federal Reserve’s favored inflation measure: the Personal Consumption Expenditure (PCE) index from the Bureau of Economic Analysis (BEA)
The PCE price index for August increased 0.3%, slightly up from July’s monthly increase of 0.2%. The index excluding food and energy increased 0.2%, slightly down from the 0.3% monthly increase seen in July.
The year-over-year increase in the PCE price index—also known as annual inflation—registered at 2.7%, ever so slightly up from the 2.6% registered in July. Despite only the slight monthly increase, inflation is at the highest level since February 2025 and April 2024. Excluding food and energy, annual inflation registered a 2.9% year-over-year increase, the same reading as in July.
Interpreting the August data is a mixed bag, said Jason Furman—a professor of economic policy at Harvard University—in a thread on X. Furman explained that inflation is “well above target for the 5th month in a row,” but that the situation is “less concerning than it looks (at least for the Fed).”
“Despite the headline, I would say this report was mildly reassuring about inflation and confirmed what we thought from retail sales about the strength of consumer spending,” he continued.
Consumer spending, as Furman called out, was indeed up in August, posting a $129.2 billion (or 0.6%) increase. This increase reflects $77.2 billion in spending on services and $52 billion in spending on goods. Personal income also increased by $95.7 billion (of 0.4%).
As the Fed recently cut interest rates for the first time this year by 0.25%, all eyes are on inflation data to see whether the potentiality of future rate cuts will remain on the table.
In a recent speech on his economic outlook, Fed Chair Jerome Powell said that the need to be careful is greater than ever as any moves carry significant risks.
“Two-sided risks mean that there is no risk-free path. If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2% inflation,” Powell said. “If we maintain restrictive policy too long, the labor market could soften unnecessarily.”
He added that the Fed doesn’t want to cut rates too early as if they “cut too early, we may find out in a year that inflation actually wasn’t under control and it’s back up to three and half or four percent; no one thinks this is the base case, but that’s the risk of cutting too early or too much.”
On the other hand, in his recent speech newly elected Federal Reserve Governor Stephen Miran called for a cut of 2% to interest rates, saying that moving too slow on changes in rates could raise the risk of policy mistakes. Miran had been the only dissenting vote in the recent FOMC meeting, advocating for a 0.50% rate cut rather than 0.25%.
