Fed’s Preferred Price Index Points to Inflation

By the Editorial Team · Thursday, October 1, 2026

U.S. inflation stayed elevated in August, prompting the Federal Reserve to raise interest rates for the first time in nearly three years, with the Personal Consumption Expenditures price index up 3.4 percent year-over-year. Despite methodological revisions lowering recent core inflation estimates, the Fed is expected to keep rates high through 2029, though there is growing debate over whether additional hikes are needed given signs of economic resilience and cautious consumer spending.

U.S. inflation remained elevated in August, underscoring the Federal Reserve’s recent decision to raise interest rates for the first time in nearly three years. According to the central bank’s favored inflation measure, the Personal Consumption Expenditures (PCE) price index, overall prices increased by 0.3 percent in August and were 3.4 percent higher compared with the same month last year.

Core inflation, which excludes food and energy prices and is viewed as a clearer indicator of underlying inflation trends, rose 0.2 percent month over month—slightly faster than in July but marginally better than economists had anticipated. Year-over-year, core prices were up 3 percent, remaining steady from the previous month.

Alongside the inflation data, the Commerce Department implemented methodological revisions to the calculation of prices in certain areas, including legal services, investment fees, and computer software and accessories. These adjustments, applied retroactively to data dating back to 2021, led to lower reported core inflation rates in recent months than previously estimated. The changes were part of the Bureau of Economic Analysis's routine annual review and involved adopting more reliable data sources, such as shifting to producer prices from the Bureau of Labor Statistics for legal services.

Although the revisions lowered the year-over-year core inflation rate by more than three-tenths of a percentage point in July, economists caution that the changes are unlikely to significantly alter the broader inflation outlook. “It doesn’t really change the big picture. It just helps you a bit at the margin,” said Omair Sharif, founder of the forecasting firm Inflation Insights.

The updated inflation figures, combined with strong consumer spending—up 0.9 percent in August, or 0.6 percent after adjusting for inflation—and a revision showing stronger-than-expected economic growth in the second quarter, suggest some resilience in the U.S. economy despite rising prices. This may provide Federal Reserve officials with some latitude to pause or proceed cautiously with further interest rate hikes.

Currently, the federal funds rate stands between 3.75 and 4 percent. Most Fed policymakers expect to maintain elevated rates until at least 2029 to reach their 2 percent inflation target. A majority forecast at least one additional quarter-point rate increase later this year, though investors are now pricing in a roughly two-thirds chance that the Fed will hold rates steady at its upcoming late-October meeting. This shift follows remarks by John C. Williams, president of the Federal Reserve Bank of New York and vice chair of the policy-setting committee, who indicated that there is “no need for urgency” in increasing rates after September’s adjustment, stating, “We have time to gather more information.”

Despite these signs of caution, concerns remain about the sustainability of consumer spending. Real after-tax incomes were flat in August, as wage gains were eroded by inflation. The personal saving rate dropped to 4.1 percent, its lowest level in nearly four years, while borrowing costs are rising, with the average mortgage rate on a 30-year loan reaching 7.58 percent—the highest since 2023.

Fed Chair Kevin Warsh has so far avoided specifying the pace or timing of future rate hikes, describing the recent increase as merely the removal of a “dose of accommodation.” Market participants will look to upcoming data releases for further guidance, including the Bureau of Labor Statistics’ jobs report set for release later this week and the Consumer Price Index report due in mid-October.

Overall, while the latest inflation data and methodological revisions suggest some moderation in price pressures, Federal Reserve officials continue to view returning inflation to the 2 percent target as a work in progress.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.