Inflation cooled more than expected in August, according to data released Wednesday by the Bureau of Economic Analysis. The report tracks the Personal Consumption Expenditures (PCE) Index, the Federal Reserve's preferred measure of price changes and its key gauge of progress toward the 2% inflation target. Because interest-rate decisions rest on that benchmark, the release is among the most closely watched on the economic calendar, with the resulting policy path shaping borrowing costs for households and businesses. The softer-than-forecast readings promptly reshaped expectations for the central bank's next policy meeting.

US 🇺🇸 PCE / GDP DATA: Core PCE YoY: 3.0% (Est. 3.3%, Prior 3.3%) Core PCE MoM: 0.2% (Est. 0.3%, Prior 0.2%) PCE YoY: .4% (Est. 3.7%, Prior 3.7%) PCE MoM: 0.3% (Est. 0.3%, Prior 0.2%) Q2 Final GDP: 2.2% (Est. 1.5%) Advance Goods Trade Balance: -$132.6B (Est. -$115B, Prior…) — Wall St Engine (@wallstengine) September 30, 2026

The figures showed cooling across both the core and headline measures, alongside an upward revision to second-quarter growth.

Core and Headline Readings Both Below Forecast

Core PCE, which excludes volatile food and energy prices, rose 3% compared with a year earlier. That is down from 3.3% in July and below the 3.3% increase economists had expected. Month over month, core PCE increased 0.2%, matching July's pace but falling short of forecasts calling for a 0.3% rise.

Headline PCE, which includes food and energy, climbed 3.4% year over year, cooler than both the 3.7% economists had forecast and the 3.7% posted in July. On a monthly basis, headline PCE advanced 0.3%, in line with estimates and slightly above the prior month's 0.2% pace.

The Fed tracks the PCE index rather than the more widely quoted Consumer Price Index because its weights adjust to reflect how consumers actually shift their spending between categories.

Why the Numbers Came In Lower

Part of the drop is tied to a change in how the government calculates certain costs. The Bureau of Economic Analysis updated its methodology for measuring computer software, legal fees, and investment advice, applying the revision retroactively back to 2021 and restating prior readings in the process. Two of the affected categories — software and investment advice — had recorded sharp price increases over the past year, meaning a portion of the reported slowdown reflects statistical methodology rather than underlying price behavior alone.

Capital Economics economist Stephen Brown estimated that the revisions removed about 0.3 percentage points from the overall core inflation rate. He also noted that the three-month annualized core inflation rate now stands at exactly 2%, matching the Fed's target.

"Core price pressures are slightly less firm than feared and provide some support to our view that the Fed will pause in October," Brown said.

What This Means for the Fed's Next Move

The cooler reading is likely to ease pressure on the Federal Reserve to raise interest rates again next month. New York Fed President John Williams, speaking Tuesday in Buffalo ahead of the report's release, said he sees "no need for urgency" when it comes to raising rates. He added that the Fed has time to collect more data before making a decision.

Williams said he still expects one more rate hike before the end of the year. That timeline points more toward December than the Fed's October meeting.

Following his comments, traders lowered their expectations for an October hike. According to CME Futures — whose fed funds contracts are a widely used barometer of rate expectations — the odds of a move next month fell to about 35%, down from 50% on Tuesday and around 70% earlier in the week. Before the December meeting, officials will receive several more monthly employment and inflation readings, the additional data Williams said the Fed has time to collect.

Not Every Official Sees a Durable Trend

Not every Fed official is convinced the cooling trend is solid. Fed Governor Michael Barr said Tuesday that only two of the past 20 months have shown core PCE consistent with the 2% target.

"I don't yet see a clear trend toward a timely return to 2 percent," Barr said. Wednesday's report would mark a third data point toward that trend.

Barr pointed to higher energy prices and the buildout of AI infrastructure as factors keeping inflation elevated. He said tariff effects have faded, but energy costs remain high. He also cited uncertainty tied to the Iran war and its impact on energy prices, and said investment and demand tied to AI are having a measurable effect on overall prices.

GDP Estimate Revised Higher

Alongside the inflation figures, the government released its third estimate of second-quarter GDP growth on Wednesday. The economy grew at a 2.2% annual rate, up from the previous estimate of 1.5% and ahead of the 1.5% economists had projected. The advance goods trade balance, also published Wednesday, showed a deficit of $132.6 billion, wider than the $115 billion shortfall forecast. The advance goods report offers an early read on trade flows that feeds into subsequent GDP estimates.