The Federal Reserve’s preferred inflation gauge remained elevated in August, complicating the Fed’s path to its 2% target. Core PCE held at 3.0% year-over-year for the third consecutive month. Though the reading came in lower than expected, it’s not necessarily a sign of disinflation. The Bureau of Economic Analysis updated the PCE deflator methodology to better reflect household spending patterns, which likely trimmed the year-over-year increase. The revisions were applied retroactively through the first quarter of 2021. Meanwhile, the personal saving rate dropped to the lowest level in nearly four years, as persistent inflation offset wage growth while consumer spending accelerated.
The headline Personal Consumption Expenditure (PCE) Price Index increased 3.4% in August from a year ago, unchanged from last month, according to the Bureau of Economic Analysis. The “core” PCE price index, which excludes food and energy, rose 3.0% over the past twelve months, the same increase as last month. Core PCE has remained at or above 3.0% since the start of the Iran conflict, suggesting inflation pressure persists even excluding volatile energy prices.
Consumer spending rose 0.9% in August, and real spending, adjusted to remove inflation, increased 0.6%, the largest monthly increase since March 2025.
Meanwhile, personal income rose 0.2% in August. This growth was led by increases in compensation and government social benefits. Real disposable income—income adjusted for taxes and inflation—was unchanged. On a year-over-year basis, personal income was 4.3% higher, and real (inflation-adjusted) disposable income was up 1.3%.
With spending growth outpacing income growth, the personal saving rate fell to 4.1% in August, the lowest level since November 2022. The personal saving rate has been on a downward trend since the start of this year, with the exception of July.
