PCE Inflation Cools to 3.0%, but Fed Rate Hikes Stay Live

Core PCE inflation slowed to 3.0% in August, below the 3.3% forecast, yet Kashkari says inflation is too high and interest rates may rise again in 2026.

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Core PCE inflation, the federal reserve's preferred price gauge, rose 3.0% in the 12 months to August, undershooting the 3.3% consensus forecast, the Bureau of Economic Analysis reported on September 30. Headline PCE slipped to 3.4% from 3.7% in the prior reading. Minneapolis Fed President Neel Kashkari said hours later that inflation "remains too high" and that the data did not change his view, keeping the outlook for interest rates tilted toward further tightening.

What Did the August PCE Report Show?

The August report showed core prices, which exclude food and energy, rising 0.2% on the month, against a forecast of 0.3%. Headline prices rose 0.3% on the month, broadly in line with expectations.

Energy was the main upward force on the headline figure. Gasoline prices rose 4.4% in the month and transportation services climbed 1.4%, offsetting moderation in underlying goods and services categories.

Consumer demand stayed firm. Real consumer spending rose roughly 0.6% on the month while the saving rate declined, a pattern that suggests higher borrowing costs have not yet restrained household demand.

Why Did the Headline Numbers Fall So Sharply?

The sharp drop in the annual rates reflects a statistical overhaul as much as a change in prices. The BEA's annual update changed how it measures portfolio management fees, investment advice fees, computer software and legal services, and applied the changes retroactively to 2021.

Under the revised methodology, July headline PCE was restated at 3.4% rather than 3.7%, and July core PCE at 3.0% rather than 3.3%. The fall from 3.7% to 3.4% in headline inflation therefore compares an old reading with a new series. Estimates put the effect of the revisions at roughly 0.2 percentage points off core inflation, driven mainly by software.

On the revised basis, core inflation was unchanged at 3.0% between July and August. That makes the 0.2% monthly core gain, which is unaffected by the historical restatement, the more reliable signal of cooling.

What Did Kashkari Say About Inflation and Rates?

Kashkari said inflation is still too high, describing it as running near 3% and having stayed elevated for more than five years. In an interview at a Council on Foreign Relations event in New York, he said the softer PCE print did not change the story for him.

He said he expects one more rate increase in 2026 and another in 2027. He also argued that the neutral rate, the level of interest rates that neither stimulates nor restrains the economy, may sit higher than officials have assumed. He described the economy as resilient, citing consumer spending and GDP data, and called the labor market "pretty good."

How Does This Affect the Fed's Next Move?

The report gives the central bank room to be patient but not to stop. A 0.2% monthly core reading is slower than the 0.3% pace that would keep annual inflation stuck near 3%, and it strengthens the case against urgency at the next meeting.

Several factors argue against a pause:

• Annual core inflation remains roughly one percentage point above the Fed's 2% target even after the methodology change.
• Strong real spending and a falling saving rate show demand is still absorbing higher borrowing costs.
• Energy prices are lifting headline inflation, which can feed into household inflation expectations.

The revision also complicates the Fed's communication. Officials who projected inflation under the old series now face a lower baseline, which narrows the visible distance to target without any change in underlying price behavior. Policymakers such as Kashkari are likely to keep pointing to the monthly run rate rather than the restated annual figures.

What Comes Next for Inflation Data and Rates?

The next test is the September PCE report, followed by the consumer price index. Both will show whether the 0.2% core pace holds or whether energy costs begin to spread into broader categories such as transportation and services.

Two scenarios frame the near-term path. If monthly core inflation stays at or below 0.2%, the case for a December hike weakens and the debate shifts toward how long to hold rates at the current level. If core readings return to 0.3% or higher, driven by services or pass-through from fuel costs, the committee's projected additional hike becomes harder to avoid, and the neutral-rate argument advanced by Kashkari gains weight.

For households and businesses, the immediate effect is limited. Borrowing costs remain elevated, and the fed rate path is still biased toward a further increase rather than a cut.

Outlook

August's PCE data came in cooler than forecast, but much of the headline improvement stems from the BEA's retroactive methodology change. The 0.2% monthly core gain is the substantive positive, while energy-driven headline pressure and resilient spending keep the policy debate open. With inflation near 3%, Kashkari still expects another rate hike this year, and the September inflation reports will determine whether the Fed delivers it.