Key Takeaways
Consumer prices rose 2.7% over the year in August as measured by PCE inflation, up from 2.6% in July, while “core” prices excluding food and energy rose 2.9%, the same as in July.
Prices are increasing faster than the Federal Reserve’s goal of a 2% annual rate.
The uptick was not surprisingly high, so the Fed likely remains on track to continue cutting its key interest rate despite inflation concerns.
There’s still no sign that inflation is headed down towards the Federal Reserve’s goal of a 2% annual rate.
Consumer prices as measured by the Personal Consumption Expenditures price index, rose 2.7% over the year in August, up from a 2.6% annual increase in July, the Bureau of Economic Analysis said Friday. “Core” PCE prices, which exclude volatile prices for food and energy, rose 2.9% over the year, the same as in July. Policymakers and economists closely watch “core” prices because they are a better indicator of broad inflation trends.
The increase matched the expectations of forecasters, and the lack of a surprise inflation surge kept expectations in financial markets intact that the Fed will cut its key interest rate in October for the second time this year despite concerns that inflation is still higher than the central bank’s target. President Donald Trump’s tariffs are pushing up prices as merchants pass the cost of the import taxes on to consumers, economists have said.
How This Affects Your Finances
The report is yet another indicator of the stubbornness of the post-pandemic surge of inflation, and a reminder that a return to the relatively low inflation of the pre-pandemic era may be years away. In the meantime, expect prices for everyday items to continue to rise at a faster pace than in years past.
Consumers Are Spending Like Crazy
Consumer income and spending both rose faster than inflation in August. Personal income rose 0.4% over the month, which was more than the 0.3% forecasters anticipated according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. Likewise, spending rose 0.6% versus a forecast for a 0.5% uptick. Both were above the 0.3% increase in prices, suggesting household finances as a whole improved in August.
The healthy consumer spending figures added to recent evidence that the economy is on more solid footing than previously thought. Fed officials are cutting rates, lowering borrowing costs on all kinds of short-term loans to boost the economy and counteract a recent slowdown in the job market, but they may feel less pressure to do so if the economy maintains its momentum.
“American households continue to spend, likely driven by the wealthiest households,” Ali Jaffery, an economist at CIBC wrote in a commentary. “That presents an underappreciated risk that the Fed is going to have to take a slower route back to neutral than the market would like.”
Rich Households Holding The Economy Together
Consumers have continued to increase spending in recent months despite tariffs pushing up prices for imported goods and dragging on the job market. At the same time, however, more people have fallen behind on their bills and surveys show people are growing gloomier about the outlook for their own finances and the economy.
The contradiction is likely because higher-income households are doing better and lower-income ones are being squeezed hard, according to an analysis this week by Michael Pearce, chief U.S. economist at Oxford Economics.
Lower-income households, which spend higher proportions of their income, have been hammered by the post-pandemic surge of inflation, and now by tariff-related price increases, Pearce wrote. Meanwhile, wealthier households that can invest more of their income have benefitted from rising stock values. The phenomenon is likely to persist into the near future.
“Delinquency rates among the most heavily indebted households will rise as lower-income consumers face mounting pressure,” he wrote. “We’re also likely to see continued depressed consumer sentiment readings, even as spending, driven by a narrow slice of households, remains strong.”
Update, Sept. 26, 2025—This story has been updated after publication to include data from the PCE report and commentary from economists. It was originally published Sept. 26, 2025.