The Fed Faces a Crucial Inflation Test Wednesday: What the PCE Report Could Mean for Interest Rates
The Federal Reserve‘s preferred inflation gauge will be released Wednesday morning, and economists expect the report to reinforce an uncomfortable message for policymakers: Price pressures are still stubbornly high even as American consumers continue to spend.
The Bureau of Economic Analysis will release the August Personal Consumption Expenditures price index, or PCE, at 8:30 a.m. ET on Wednesday. The report will be closely watched after the Fed raised interest rates earlier this month and signaled that additional tightening could be necessary before the end of the year.
Economists surveyed by Dow Jones expect both headline and core PCE prices to have risen 0.3% from July. On a 12-month basis, headline inflation is projected to remain at 3.7%, while core PCE, which strips out volatile food and energy prices, is expected to hold at 3.3%.
Those readings would leave inflation substantially above the Fed’s 2% target and offer policymakers little evidence that underlying price pressures are easing decisively. July’s PCE report also showed headline inflation at 3.7% and core inflation at 3.3%.
The stakes have increased following the Fed’s September 16 decision to raise its benchmark interest rate by a quarter percentage point to a range of 3.75% to 4%. The central bank said economic activity continued to expand at a solid pace and domestic spending remained resilient, but acknowledged that inflation was still elevated.
Most Fed policymakers also indicated that another rate increase could be necessary this year. Sixteen of 18 officials who submitted projections at the September meeting expected at least one additional hike in 2026.
New York Fed President John Williams has taken a more patient approach, saying another increase this year would be reasonable while emphasizing that policymakers have time to assess incoming economic data. Williams has pointed to easing housing inflation and limited evidence that the labor market itself is generating additional inflationary pressure.
However, the BEA is revising its methodology for several components of the PCE index, including legal services, software and computer accessories, and portfolio management services. The changes will be applied retroactively, potentially lowering previously reported inflation readings.
The report will also provide another important piece of the economic puzzle: consumer spending. Economists expect personal consumption expenditures to have jumped 0.8% in August after increasing just 0.2% in July.
Part of that acceleration reflects higher gasoline prices, but other measures suggest households have continued opening their wallets despite persistent inflation and weakening sentiment.
That resilience matters to the Fed because strong demand can make inflation more difficult to bring under control. The central bank is attempting to cool price increases without unnecessarily damaging employment or economic growth.
U.S. consumer confidence dropped sharply in September to its lowest level in more than 12 years as Americans became increasingly concerned about inflation, employment, and the broader economy.
