Soft PCE Inflation Keeps Fed in Rate-Cut Spotlight as Tariffs Loom

The Commerce Department on Friday reported that the personal consumption expenditures price index rose 0.3 percent in August, keeping the annual rate at 2.7 percent. Excluding food and energy, inflation in the PCE rose 2.9 percent.

The PCE is the Federal Reserve's preferred inflation gauge because it captures prices households actually pay for goods and services, including items often covered by employers or the government, such as healthcare. The measure provides a broader view of household spending than the standard inflation report that tracks day-to-day living costs like food, housing, and transportation. The latest reading arrives ahead of the holiday shopping season, when price pressures in clothing, toys, and groceries have persisted since 2022.

Separately, President Donald Trump announced a new round of tariffs on prescription drugs, furniture manufacturers, and large truck producers, intensifying a strategy aimed at pressuring suppliers and consumers ahead of the holidays.

Markets moved higher on the inflation news, with the S&P 500, Dow Jones Industrial Average, and Nasdaq rising about 0.5 percent in early trading as investors weighed the potential for continued rate cuts.

The Federal Reserve cut rates by 25 basis points in an 11-1 vote last Wednesday, ending a period of elevated policy rates that stretched for more than four years. The decision drew broad support, though some governors signaled support for additional easing while others warned that more cuts could risk higher inflation.

Analysts said the cooler PCE reading reinforces expectations that the Fed will proceed with further rate reductions this year, assuming inflation remains contained. A market analyst noted that the PCE being the Fed's preferred gauge means even modest moves can influence policy expectations and financial conditions ahead of the holiday season.

Industry observers warned that tariff actions could filter through to consumer prices, potentially complicating households' budgeting as they prepare for Christmas shopping, even as the current data shows inflation easing somewhat. There is no consensus on how tariffs will affect prices in the near term.

The PCE measure remains a separate but closely watched gauge from the consumer price index, and it has been used to judge the trajectory of inflation since the Fed began its policy regime. The central bank has described the path of policy as data-dependent, with the next moves hinging on incoming inflation readings and labor-market conditions. The latest reading comes as the Fed has slowly transitioned from an era of tightening to one of potential easing, contingent on price stability.

Retailers have signaled that pricing pressures and tariff costs could affect holiday sales, making the inflation data and policy outlook particularly relevant for investors and shoppers alike.