Research
September 26, 2025
PCE Deflator
PCE Inflation Holds Steady as Consumers Spent Solidly in August
The Personal Consumption Expenditures (PCE) deflator—the Federal Reserve’s preferred measure of inflation—rose by 0.3% in August, edging up from the 0.2% gain in July and matching market expectations. Food prices jumped 0.5%, the largest monthly increase since March, while energy costs rebounded 0.8% following a 1.1% decline in July. Notably, energy prices have seesawed from month to month since March. Core PCE, which excludes food and energy, increased 0.2% for the second consecutive month.
On a year-over-year basis, the headline PCE deflator rose 2.7% in August, up from 2.6% in July and marking the highest annual rate since February. Core inflation held steady at 2.9% year-over-year for the second straight month. Both measures have trended higher since reaching post-pandemic lows in March.
Over the past 16 months—since May 2024—core inflation has averaged 2.8%, highlighting how the earlier moderation in pricing pressures has largely stalled. Still, both headline and core inflation have cooled significantly from their pandemic-era peaks of 7.1% (headline PCE in June 2022) and 5.5% (core PCE in September 2022). Yet, efforts to bring inflation closer to the Fed’s 2% target have remained elusive.
For now, employment concerns are outweighing inflationary risks, with the Federal Reserve actively considering further rate cuts in the months ahead. The Federal Open Market Committee reduced the federal funds rate by 25 basis points at its most recent September 17–18 meeting, and it is expected to make additional reductions in short-term interest rates at potentially both of the next two FOMC meetings: October 28–29 and December 9–10.
Beyond prices, personal consumption expenditures rose 0.6% in August, building on the solid 0.5% gain in July. Notably, spending on foodservices and accommodations surged 0.9%, a sharp acceleration from the 0.1% increase in the prior month. Over the past 12 months, total personal spending has grown a healthy 5.6%, with expenditures on foodservices and accommodations up 5.7% since August 2024.
However, part of this growth reflects higher prices, even as real spending continues to rise at a more modest pace. Inflation-adjusted personal consumption increased 2.7% year-over-year, while real spending on foodservices and accommodations rose 3.0%. As such, even after accounting for inflation, consumers are spending more on dining and travel—a positive signal for those sectors, albeit at a softer pace than might be preferred.
Personal income rose 0.4% in August, matching the pace in July. Wages and salaries increased 0.3% in August, easing a bit from the 0.5% gain seen in July. Solid wage growth has been a large contributor to the economy’s resilience.
Amid these trends, the personal savings rate declined from 4.8% in July to 4.6% in August, the lowest since December. It is notable that the savings rate in the post-pandemic era remains lower than historic norms. From 2017 to 2019, the pre-pandemic average was 6.5%. Since the start of 2023, the rate has averaged just 5.4%.
On a year-over-year basis, the headline PCE deflator rose 2.7% in August, up from 2.6% in July and marking the highest annual rate since February. Core inflation held steady at 2.9% year-over-year for the second straight month. Both measures have trended higher since reaching post-pandemic lows in March.
Over the past 16 months—since May 2024—core inflation has averaged 2.8%, highlighting how the earlier moderation in pricing pressures has largely stalled. Still, both headline and core inflation have cooled significantly from their pandemic-era peaks of 7.1% (headline PCE in June 2022) and 5.5% (core PCE in September 2022). Yet, efforts to bring inflation closer to the Fed’s 2% target have remained elusive.
For now, employment concerns are outweighing inflationary risks, with the Federal Reserve actively considering further rate cuts in the months ahead. The Federal Open Market Committee reduced the federal funds rate by 25 basis points at its most recent September 17–18 meeting, and it is expected to make additional reductions in short-term interest rates at potentially both of the next two FOMC meetings: October 28–29 and December 9–10.
Beyond prices, personal consumption expenditures rose 0.6% in August, building on the solid 0.5% gain in July. Notably, spending on foodservices and accommodations surged 0.9%, a sharp acceleration from the 0.1% increase in the prior month. Over the past 12 months, total personal spending has grown a healthy 5.6%, with expenditures on foodservices and accommodations up 5.7% since August 2024.
However, part of this growth reflects higher prices, even as real spending continues to rise at a more modest pace. Inflation-adjusted personal consumption increased 2.7% year-over-year, while real spending on foodservices and accommodations rose 3.0%. As such, even after accounting for inflation, consumers are spending more on dining and travel—a positive signal for those sectors, albeit at a softer pace than might be preferred.
Amid these trends, the personal savings rate declined from 4.8% in July to 4.6% in August, the lowest since December. It is notable that the savings rate in the post-pandemic era remains lower than historic norms. From 2017 to 2019, the pre-pandemic average was 6.5%. Since the start of 2023, the rate has averaged just 5.4%.