The Federal Reserve's preferred inflation gauge cooled slightly in August, even as central bank officials warn that further interest rate increases may be necessary to bring price pressures under control.
The personal consumption expenditures (PCE) price index rose 0.3% from July and was up 3.4% year-over-year, according to data released Wednesday by the Bureau of Economic Analysis. Core PCE, which strips out volatile food and energy costs, rose 3.0% annually.
The latest readings came in below projections from the Federal Reserve Bank of Cleveland, which had estimated annual PCE inflation at 3.7% and core inflation at 3.4%. The July figures were unchanged at 3.7% for both the headline and core measures.
Inflation has remained stubbornly above the Fed's 2% target for more than five years, and has been exacerbated this year by the ongoing conflict in Iran. The consumer price index also showed a 3.4% annual increase in August.
In response, the Federal Open Market Committee (FOMC) raised its benchmark interest rate by a quarter percentage point earlier this month, bringing the target range to 3.75%–4%. The move was unanimous.
“The plain fact is that inflation is too high and has been for too long,” Fed Chair Kevin Warsh said after the vote. “This summer's inflation readings do not tell me that underlying trends have meaningfully improved.”
Since then, several FOMC officials have signaled more tightening could be on the way. The committee is scheduled to meet again on Oct. 27–28.
Philadelphia Fed President Anna Paulson said last Thursday that if current conditions persist, “modest further tightening” would be warranted. Fed Governor Michael Barr echoed that sentiment last week, saying “further policy adjustments” are likely needed. He reiterated those remarks on Tuesday at the Detroit Economic Club.
“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.
Market participants are pricing in a 47.1% chance of a quarter-point hike at the October FOMC meeting, according to the CME FedWatch tool. The Fed's decisions come amid broader economic uncertainty, including AI-driven demand that is broadening inflation across the economy, as noted by Fed Governor Lisa Cook.
The persistence of high prices has also fueled political tensions, with some lawmakers pushing for curbs on the administration's war powers amid the Iran conflict, which has contributed to energy price volatility. Meanwhile, the Fed's rate hikes have ripple effects on federal programs, including rising costs for early childhood education.
