The latest Personal Consumption Expenditures data came in cooler than expected early Wednesday, although elevated levels of inflation mean that advisors and their clients face the very real possibility of further rate hikes.
PCE, which is the Federal Reserve’s preferred gauge of inflation, rose 3.4% year-over-year in August, declining after an annual increase of 3.7% in July, according to the Bureau of Economic Analysis. Economists surveyed by Dow Jones Newswires and the Wall Street Journal were looking for an increase of 3.7%.
From the prior month, PCE rose 0.3% in August, in line with economists’ estimates, after rising 0.2% in July.
The Core PCE price index, which excludes food and energy, rose 0.2% in August, holding steady after rising 0.2% in July. Economists were looking for an increase of 0.3%. On a year-over-year basis, Core PCE rose 3%, after rising 3.3% in July. Economists surveyed by Dow Jones Newswires and the Wall Street Journal were looking for an increase of 3.3%.
The Federal Reserve delivered a rate hike earlier this month, raising its policy rate to a range of 3.75% to 4%, after weeks of speculation. The decision, unanimously approved with a 12-0 vote, marked the central bank’s first hike since July 2023, which at the time reset the benchmark to its highest level in 22 years.
"This is a small relief amid all the doom and gloom, but it's nowhere near enough to pause the rate-hiking cycle,” said Nic Puckrin, macro analyst and founder of Coin Bureau, of the latest PCE data, in a note. “Middle East tensions are still in full swing, oil is above $100, diesel prices are at all-time-high.”
“The problem is, the Fed can't hike out of the energy crisis,” he added. “At this point, even reopening the Strait of Hormuz won't fix it straight away.”
All eyes are now on the Fed’s forthcoming meetings amid the potential for further rate hikes.
After the release of the PCE data, the CME’s FedWatch tool put the probability of an October meeting rate hike to between 4% and 4.25% at 34.9%, down from 44.8% before PCE announcement. The tool, which updates in real time, put the likelihood of rates being unchanged at 65.1%, up from 55.2% before the release of the inflation data.
But for the Fed’s December meeting, which would mark its last rate decision for the year, the tool gives a 4% to 4.25% hike a probability of 59.4%, up from 53% before the release of the PCE data. A hike of 4.25% to 5% has a probability of 28.3%, down from 35.5%.
Early Wednesday the Bureau of Economic Analysis also reported that real GDP increased at an annual rate of 2.2% in the second quarter of 2026, according to its third estimate. Economists surveyed by Dow Jones Newswires and the Wall Street Journal were looking for an increase of 1.5%.
Real GDP was revised up 0.7 percentage point from the second estimate, the BEA said, primarily reflecting upward revisions to investment, consumer spending, and government spending
Separately, the latest ADP National Employment Report said that U.S. private employers added 90,000 jobs in September, above economists’ 68,000 forecast.
“The underlying economy proves resilient once again, with Q2 GDP growth revised up to 2.2% alongside a particularly strong Q3 GDP nowcast,” said Adam Hetts, global head of multi-asset and portfolio manager at Janus Henderson Investors. “While today’s inflation data is somewhat better than expected, strong labor and GDP data suggest the print is unlikely to derail consensus expectations for another rate hike before the end of the year.”
Last week the Atlanta Fed gave a GDPNow model estimate for real Q3 GDP growth, on a seasonally adjusted annual rate, of 5%.
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