On the rewritten data, the Fed's preferred gauge ran at 3.4% in both July and August, and the core rate has held at 3.0% for three months. Futures traders still cut the odds of an October rate increase to about 35%.
The Federal Reserve's preferred inflation gauge landed well under forecasts on Wednesday. Nearly all of the gap came from history, not from August.
The personal consumption expenditures price index rose 3.4% in the 12 months through August, the Bureau of Economic Analysis said, and 0.3% from July. Core prices, which exclude food and energy, rose 3.0% from a year earlier and 0.2% on the month. Economists had expected 3.7% on the headline measure and 3.3% on core.
Those forecasts matched the July rates the bureau published a month ago, and those July rates have now been replaced. Wednesday's report carried the bureau's annual update of the national accounts, with revisions reaching back to January 2021. Headline July inflation is now 3.4%, not 3.7%. Core July is now 3.0%, not 3.3%. July's monthly gains were lowered to 0.1% from 0.2% on both measures.
The August shortfall and the July revision are the same size: 0.3 percentage point on each measure. On the new series, annual inflation did not slow from July to August. It held at 3.4% headline and 3.0% core. Core has now read 3.0% in June, July and August, after 3.2% in May.
What changed in the math
The bureau changed how it measures prices in three categories. Fees for portfolio management and investment advice are now deflated with an implied price built from a Labor Department employment-based quantity measure, rather than a producer price index. Legal services now use a blend of producer price indexes, replacing a consumer price series the bureau said had gone mostly unpublished since 2023. Computer software and accessories now draw on consumer prices plus producer indexes for game software publishing and for hosting and IT infrastructure services.
The effect was not spread evenly across the years. The bureau called its revisions to 2021 through 2025 small, with headline PCE inflation moving by no more than 0.1 point in any year. The changes to 2026 were larger. First-quarter core inflation was lowered to an annualized 3.9% from 4.4%, and second-quarter core to 3.3% from 3.6%. Second-quarter headline PCE inflation fell to 5.0% from 5.3%.
Economists at RBC had warned in advance that the update would pull the core rate down and should not be read as disinflation. They estimated that revised July core would come in at 3.1%. The bureau's number, 3.0%, was lower still.
How markets took it
Traders read the report as easing pressure on the Fed. Futures pricing put the chance of a quarter-point increase at the Oct. 27-28 meeting at about 35% after the data, down from about 51% on Tuesday and about 70% a week earlier. The two-year Treasury yield, the maturity most tied to Fed expectations, slipped to 4.864% from 4.887% in the morning. The 10-year yield went the other way later in the day, rising to its highest level since 2002.
The inflation figures were not the morning's only input. Private hiring and the second-quarter growth estimate both came in above forecasts in the same window.
Two readings
One reading is that measured inflation really is lower than the Fed and investors believed. If the old methods overstated price growth in 2026, then the core rate near 3.3% that framed this month's rate increase was too high, and trimming October odds is the right response.
The other reading is that the revision lowered the level without changing the direction. On the new basis, core has been flat at 3.0% for three months. Unrounded, August's core monthly gain was about 0.25%, a pace that compounds to roughly 3% a year. The same report showed consumer spending up 0.9% in August, and second-quarter growth was revised up to 2.2% from 1.5%. "I don't think that it changes the story with the Fed," said Cooper Howard of the Schwab Center for Financial Research. "We still expect at least one more hike this year."
What comes next
Friday's September jobs report is the next input before the Fed meets, followed by the September consumer price index in mid-October. The September PCE report on Oct. 29, the day after the Fed's decision, will be the first full month measured under the new methods from the start.