CPI Inflation Holds at 3.4% as Cooler PCE Data Eases Fed Pressure

A familiar headline in a different economy

The phrase "cooling inflation" has come back into economic coverage. Four years ago, a regional broadcast used it when consumer prices rose 7.7% in October 2022, down from 8.2% in September. Economists then saw that drop as an early sign that the worst inflation in 40 years had peaked over the summer.1 That episode topped out near 9% in 2022, and inflation later settled in the 2–3% range, a little above the Federal Reserve's 2% goal.14

The 2026 version is smaller, and in some ways harder to read. Headline inflation is now in the mid-3% range. It spiked earlier this year on an energy shock tied to the U.S.-Iran war and has eased only slowly since. The latest data offer some cooling, but much less than "cooling inflation" usually suggests. Our view is that the improvement is real but narrow. The data are good enough to cool talk of another quick rate hike, but not good enough to say the inflation problem is solved.

What the consumer price index actually showed

The most recent consumer price index, for August, did not show much cooling. Overall prices rose 0.4% from July and 3.4% from a year earlier. Core prices, which leave out food and energy, rose 0.3% for the month and 2.4% over the year.13 Forecasters had expected the annual rate to slip to 3.3% and core prices to rise only 0.2% for the month.15 The report came in slightly hotter than expected on both counts.

The broader trend is better than that single report. The June CPI fell 0.4% in a month, its biggest one-month drop in six years. Energy prices fell 5.7% after a temporary ceasefire reopened shipping lanes, and the annual rate dropped to 3.5%.8 July brought a second month of cooling, to 3.4%, with core inflation at 2.5%.9 August held at 3.4%. So headline inflation has stopped falling rather than started rising again.

Energy explains most of the movement. Gasoline rose 3.9% in August and fuel oil jumped 10.1%. Heating fuel was up about 52% from a year earlier, which matters as winter approaches.13 Higher fuel costs also pushed up airfares, which were up nearly 25% from a year earlier.13 Before June's drop, energy prices had risen 10.9% in March, 3.8% in April and 3.9% in May after the war began on Feb. 28.8

Outside energy, the picture is mixed. The tariff shock to goods prices seems to have faded, with household furnishings up less than 1% over the year.13 Grocery prices were flat for the month and up 2.2% over the year.13 Some worrying signs remain, though. "Supercore" inflation, which covers services other than energy and housing, rose 0.5% in August and was up 3% from a year earlier.13 Before the report, forecasters also pointed to AI data center construction. It is pushing up prices for memory and data storage, and personal computers made up about a quarter of July's core goods increase.15

Why the PCE report changed the conversation

Most of the recent talk about cooling comes from the Fed's preferred measure, the personal consumption expenditures (PCE) price index, not from the CPI. The August PCE index rose 3.4% from a year earlier, below the 3.7% forecast. Core PCE rose 3%, below the expected 3.3% and down from 3.3% in July.11 Monthly core PCE slowed to 0.2%.11

Outlets read this report in noticeably different ways. Yahoo Finance said it could reduce the urgency of another rate hike. It cited Capital Economics' Stephen Brown, who expects the Fed to pause in October.11 The Associated Press stressed that monthly prices still rose 0.3%, up from 0.1% in July, and that inflation is not heading back to target anytime soon.1719 Fifth Third's Bill Adams told the AP that the trend is lower but not close to the target and not improving.16

Both readings are true, and a method change helps explain the gap. The Bureau of Economic Analysis changed how it measures prices for computer software, legal fees and investment advice, going back to 2021.11 Brown estimated the changes cut about 0.3 percentage point from core inflation. After the revisions, the three-month annualized core rate is exactly 2%.11 July's headline PCE figure was revised from 3.7% to 3.4%.16 Part of the revision reduced the weight of computer accessories whose prices rose with AI demand.19

Our reading: part of the "cooling" happened in the economy, and part came from changes in how prices are measured. Neither is fake. But a reading that improves partly because of new methods is weaker evidence of slowing inflation than one that improves on actual price changes alone.

The Fed's position

That difference matters because the Fed has already acted. It raised its key short-term rate in September, its first increase in three years.1619 Before that meeting, Morningstar noted rates had been at 3.50%–3.75% for months. After the August CPI report, the New York Times reported that futures markets saw about a 90% chance of a quarter-point hike.1513

The question now is whether the Fed hikes again in late October. After the PCE report, futures markets put the odds at about 35%. That was down from 50% the day before and about 70% earlier in the week.11 New York Fed President John Williams helped cool expectations. He signaled support for one more hike "late this year," which many took to mean December rather than October.11

Not all officials are convinced. Fed Governor Michael Barr said he had seen only two months of data consistent with 2% core PCE in the past 20 months, and he saw no clear trend yet.11 He blamed higher energy prices and AI-related costs for knocking the Fed off course.11 Natixis economist Christopher Hodge expressed a similar impatience before the September meeting. After 65 straight months of above-target inflation, he said, the Fed may no longer be willing to look past one-time shocks.15 Most economists in AP's coverage expect at least one more hike this year.19

The New Jersey and New York picture

For the region that first used the cooling headline, the local numbers are worse than the national ones. The CPI for the New York-Newark-Jersey City area was flat in August after rising 0.5% in July. Over the year, it was still up 4.3%, with core prices up 3.8%.2 Regional inflation peaked at 5.1% in May and has bounced around since: 4.1% in June, 4.6% in July and 4.3% in August.2 Prices in the Philadelphia-Camden-Wilmington area fell 0.7% from June to August, and the Northeast as a whole rose 0.1% in August.6

The region has had higher-than-average inflation before. In 2024, a WalletHub analysis ranked the New York metro among the areas where price growth was outpacing much of the country.5 In 2022, by contrast, the New Jersey-New York area ended the year slightly cooler than the nation, at 6.3% versus 6.5%.3 The current gap of nearly a full percentage point over the national rate is a meaningful burden on regional households.

Why households don't feel the relief

One point nearly all the coverage agrees on is that cooling inflation does not mean lower prices. Florida Atlantic University economist Eric Van Tassel made the point plainly. A slower inflation rate still adds to a price level that is much higher than a year ago.12 A UCLA student data analysis found that prices for essentials keep rising while discretionary goods have leveled off. Its forecast suggests that gap could widen through 2027.14

Paychecks are not keeping up. Average hourly earnings rose 3.1% in the year to August, below the 3.4% rise in consumer prices. It was the fifth straight month that inflation-adjusted pay fell from a year earlier.13 Consumer confidence fell to its lowest level since 2014, according to the Conference Board.16 Even so, spending jumped 0.9% in August, possibly driven by wealthier households cashing in stock gains.16 Retirees could see a 3.6% Social Security cost-of-living increase for 2027, the largest since 2023. AARP's forecast was based on two of the three months used in the formula.13

What comes next

The September CPI, due Oct. 14, will settle the cost-of-living adjustment and test whether the cooler PCE reading reflects real change.13 The most useful thing to watch is how energy, supercore services and AI-related goods move together. If gasoline and heating fuel stay high while services prices stay firm, the recent cooling will look more like a break between shocks. If all three ease, the Fed could pause in October, as Williams's comments suggest.

The 2022 headline marked the start of a long decline from a very high peak. The 2026 version describes something smaller: inflation stuck around 3.4%, made to look cooler partly by new measurement methods, while households in the New York area face prices rising more than 4% a year.