Sticky PCE Inflation Data Fuels Expectations for Further Fed Rate Hikes

Key points

• The PCE price index is expected to rise 0.3% monthly, with annual rates holding at 3.7% for all items and 3.3% for core, unchanged from July.
• Consumer spending is projected to increase by 0.8% in August, driven by a surge in gasoline prices, indicating continued economic resilience.
• Fed Governor Michael Barr stated that tariffs and the war with Iran have derailed progress toward the 2% inflation goal, necessitating further rate hikes.
• New York Fed President John Williams noted that while tariff-driven goods price pressures have abated, AI-related demand and housing services remain inflationary factors.
• Markets are pricing in a high probability of an October rate hike, with potential follow-up moves in December or January.

Background

In late August, US inflation remained sticky at 3.7%, reinforcing expectations for a rate hike at the September FOMC meeting. Following the September meeting, the Fed raised rates by 25 basis points to a range of 3.75%-4%, with 16 of 18 officials forecasting at least one more hike in 2026. Prior to the current data release, August CPI and PPI data had already shifted market expectations, with the 10-year Treasury yield nearing 5% due to energy-price fears and geopolitical tensions.

How outlets are covering it

CNBC emphasizes that the PCE data will likely confirm that inflation is 'embedded' and not receding, supporting the case for further hikes. It highlights the resilience of consumer spending, noting that debt and credit card spending rose 6.9% year-over-year, driven by a 26.5% surge in gasoline. In contrast, Continuum Economics focuses on the technical aspects of the data release, noting that historical revisions to the PCE methodology for legal services and software could lower the July annual reading to 3%, potentially improving the 'rearview mirror' without changing the forward outlook. Investing.com provides a broader economic calendar context, listing the PCE release alongside GDP, ADP jobs data, and oil inventories, but offers no specific analysis on the inflation implications. The primary divergence lies in the interpretation of revisions: CNBC views them as minor adjustments that do not alter the hawkish stance, while Continuum Economics suggests they could narrow the gap between core PCE and core CPI, which has been unusually wide.

Why it matters

The PCE data is the Federal Reserve’s primary gauge for inflation, directly influencing decisions on interest rates. If the data confirms that inflation remains sticky and consumer spending is robust, it will likely reinforce expectations for further rate hikes, potentially increasing borrowing costs for consumers and businesses. This could impact financial markets, mortgage rates, and overall economic growth. Conversely, if revisions lower the annual inflation rate significantly, it might provide some relief, but the consensus remains that the Fed will prioritize price stability over growth concerns in the near term.

What to watch

Markets will closely monitor the PCE data release on Wednesday, September 30, for any signs of cooling inflation. If the data aligns with expectations, the probability of an October rate hike will likely remain high. Investors will also watch for comments from Fed officials, including Chicago Fed President Austan Goolsbee and Minneapolis Fed President Neel Kashkari, who are scheduled to speak later in the day. The next major inflation data point will be the October PCE release, which will further clarify the trajectory of price pressures and the Fed’s policy stance.