The Federal Reserve’s preferred inflation gauge rose faster in August than it had the previous month, but less than economists projected, according to Bureau of Economic Analysis (BEA) figures published Wednesday.

The personal consumption expenditures (PCE) price index increased 0.3% across all categories last month, the second consecutive monthly rise and up from 0.1% during July. Goods spending was up 0.3% following two consecutive monthly declines, while services spending was up 0.3% compared to 0.1% growth in June and July.

That left annual growth in PCE inflation at 3.4% in August, level with the prior month. Economists polled by Reuters and Dow Jones had forecast a monthly acceleration of 0.4% and annual growth of 3.7%.

Advertisement

Core PCE measures that strip out volatile food and energy prices rose 0.2% on a monthly basis and 3% from a year ago, compared to respective 0.1% and 3.3% growth in July. Economists had expected 0.3% and 3.3% growth in those core measures.

The cooler-than-expected inflation readings lowered the odds that the Fed will hike interest rates in October to about 40% compared to 50% odds the prior day, according to CME FedWatch. That market tool, which tracks federal funds rate futures contracts, still puts the chances at around 90% of at least a quarter-point rate hike by year-end.

Services spending heats up in August

Inflation that remains well above the Fed’s stated 2% target led the U.S. central bank to hike its benchmark interest rate in mid-September for the first time in three years.

A slew of Fed officials have expressed concerns that additional tightening will be necessary to bring inflation back to target. Wednesday’s updated PCE reading suggests core inflation continued to move in the wrong direction last month, though less than markets expected.

But complicating comparisons to prior months’ readings were methodological adjustments to how the BEA produces its monthly PCE report. The changes, which were previewed in June and took effect in August, revised previous PCE readings dating back to 2021.

In other words, while inflation rose less than markets expected, the measuring stick also changed.

However, underlying drivers of inflation — principally the Iran war, massive spending on artificial intelligence and financial conditions that Fed Chair Kevin Warsh said last month are minimally restrictive — remained essentially unchanged in August.

The August PCE index also showed services spending remained elevated and even accelerated in key categories.

So-called “supercore” PCE, which strips out food, energy and housing services prices, increased 0.3% last month compared to 0.1% growth in June and July. Services excluding energy and housing were up 0.4% compared to 0.1% previously.

Meanwhile, household spending on services rose 0.4% compared to 0.1% the previous month, while transportation services jumped 1.4% from 0.1% growth in July.

“Other services” — a catchall category for spending on services as diverse as haircuts, funerals, social assistance and tax preparation — increased 0.9% in August after no change in July. That was the highest level for that category since the Iran war began in late February.

Key changes to measuring PCE inflation

It remains to be seen how Fed policymakers will interpret the revisions to their preferred inflation gauge, not only moving forward but concerning the historical path of inflation over the past five years.

The BEA’s adjustments specifically involved incorporating new source data for three components of the PCE index. Those included portfolio management and investment advice services, legal services, and computer software and accessories.

Reasons provided by the BEA in a mid-August overview of the shifts were varied but overlapping. The agency said it updates and refines its statistical approach every autumn.

Changes to measures of portfolio management and investment advice service, for example, are designed to “better reflect the timing and quantity of services consumed,” the BEA said.

To do so, the agency replaced source data linked to portfolio fees with “quantity” of services extrapolated from sector employment, tying prices for those services more closely to labor inputs than stock market returns. Concerning legal services, the BEA said it replaced source data “that has become volatile and can’t be corroborated.”

Changes to the computer software and accessories component index, meanwhile, incorporated a new “BEA-composite price index” that the agency said is intended to “better reflect the composition of products included in this category.”