August PCE Inflation Missed Forecasts as Spending Rose

August’s core personal consumption expenditures price index rose 3.0% from a year earlier, below the 3.3% forecast by economists surveyed by Dow Jones. The Bureau of Economic Analysis put headline PCE inflation at 3.4%, against the survey’s 3.7% forecast. The forecast miss arrived alongside a sharp rise in consumer spending and an annual update that revised part of the inflation record used to judge August.

The BEA’s August release puts the monthly increase at 0.3% for headline prices and 0.2% for core prices, which exclude food and energy. The headline figure matched the Dow Jones survey forecast; core came in below its 0.3% forecast. Annual rates compare August with a year earlier. A forecast miss in that comparison can reflect what happened during August, changes to earlier observations, or both. The published figures do not isolate how much of the annual-rate surprise came from revisions.

August’s monthly price changes and its revised year-over-year comparisons answer different questions. Treating the annual forecast miss alone as a measure of current price pressure risks mistaking a changed starting point for a new August development.

A Below-Forecast Reading and a Busy Checkout

Consumers increased current-dollar spending by 0.9% in August, or $190.8 billion. After adjusting for prices, spending rose 0.6%. Both figures describe growth in total spending, but only the second strips out price changes. The 0.9% figure alone cannot tell a household how much more it could afford to buy. That requires looking at income as well as spending, and aggregate figures cannot describe every household’s budget.

The BEA attributes $114.1 billion of the increase in current-dollar spending to goods and $76.7 billion to services. Those are dollar changes in two spending categories. They do not show that either category’s prices rose by those amounts. Nor should anyone subtract the BEA’s $92.8 billion increase in real spending from the $190.8 billion current-dollar increase and call the remainder an inflation bill: the two figures use different price bases.

Personal income rose 0.2% in August, disposable personal income rose 0.3%, and inflation-adjusted disposable income was unchanged. The personal saving rate stood at 4.1%. Spending adjusted for prices grew while income adjusted for prices did not.

The 0.6% rise in real spending means purchases increased even after the price adjustment. The 0.2% monthly core price increase was below the economists’ forecast. Together, those observations show that stronger measured purchases did not coincide with the expected core price increase in August. They cannot show whether demand will push prices higher later. One measures purchases; the other measures a month’s change in prices.

The Yardstick Changed, Too

The BEA’s August release includes its annual update of the national economic accounts. Revisions to monthly personal-income and outlays estimates begin in January 2021. In its June preview of the update, the agency identified changes to how it adjusts spending on portfolio-management and investment-advice services, legal services, and computer software and accessories for price changes. An update can change a previously published inflation rate without prices in that earlier month changing again.

The legal-services change shows what was being repaired. BEA said it had used unpublished consumer price index values from the Bureau of Labor Statistics after the legal-services CPI was last published in September 2024. Those unpublished values did not meet BLS publication-quality guidelines and had shown erratic changes that BEA could not corroborate. Beginning in 2024, BEA said, it would replace that input with a composite index built from producer price indexes for selected legal services consumed by households.

For portfolio management, BEA planned to use an employment-based measure to estimate the quantity of services consumed instead of adjusting nominal spending with a producer price index. For software and accessories, it planned a composite price measure intended to reflect the mix of products in the category. These changes concern identified components; they do not show that every price in the PCE basket was measured poorly. The agency’s preview does not quantify their effect on August’s core reading.

A year-over-year inflation rate uses an earlier price level as its starting point. Revise that starting point and the reported rate can change, even as August’s monthly figure still records new price movement. Someone judging whether inflation is slowing needs a consistent history alongside the latest monthly reading.

July provides a bounded before-and-after example. Ahead of Wednesday’s release, July’s previously reported annual headline rate stood at 3.7%, CNBC reported. The BEA’s current PCE data page lists July at 3.4%, the same annual headline rate as August. Comparing those published figures suggests a 0.3-percentage-point downward change in July’s reported rate. This compares a pre-update news account with a post-update agency page, rather than two BEA data vintages. It establishes neither the size of any revision to July’s core rate nor the cause of the August forecast miss.

On the revised headline series, July and August both show 3.4% annual inflation. August prices nonetheless rose 0.3% from July. The annual rate asks how the price level compares with the same month a year ago; the monthly rate asks what changed since the preceding month. A steady annual rate can coexist with a monthly increase.

Real Income Stalled as Spending Grew

Fed officials approved a quarter-percentage-point rate increase at their September meeting, and most officials who submitted forecasts anticipated at least one more increase this year. The below-forecast core figure gives officials an argument for waiting for more price data. The 0.6% gain in real spending shows purchases continued to grow after accounting for prices, but one month cannot show whether that demand will sustain inflation. Headline inflation at 3.4% and core at 3.0% remained above the Fed’s 2% target; neither figure by itself settles the next rate decision.

David Russell of TradeStation argued that the release bolstered the case against an October hike but cautioned that August figures predate September’s diesel-price surge, CNBC reported. That is a market strategist’s assessment, not a decision by the Fed. An August index cannot record a September price change. Whether later energy costs persist or reach other prices remains open.

August’s inflation-adjusted disposable income was flat while inflation-adjusted spending rose 0.6%. Across the economy, purchases grew faster than the income available to pay for them. The BEA’s release does not identify which households bought more, how they financed the added spending, or how widely that pattern was shared.