Inflation rose one-tenth of a percentage point to 2.7% for the year ending in August, the Bureau of Labor Statistics reported Friday in an update to the Federal Reserve’s preferred gauge.
Economists had expected inflation in the personal consumption expenditures index to tick up by that amount.
The increase adds to signs that inflation pressures are rising, a troubling development for the economy, President Donald Trump, and the Fed. It shows that the central bank has a challenging task ahead regarding curbing inflation, even as it cut its interest rate target this month and is expected to implement more cuts in the months ahead.
Inflation is being driven more by services than goods. On an annual basis, the goods price index rose 0.9%, a relatively low number that shows relatively few indications of tariff effects. The services price index, on the other hand, rose 3.6%, a pace that is likely to concern the Fed because it suggests underlying price pressures unrelated to tariffs.
“Inflation is slowly ticking higher, but surprisingly, the pressure is now coming from both goods and services,” said Olu Sonola, head of U.S. economic research at Fitch Ratings. “While there isn’t much evidence of tariff-induced inflation in this report, the Fed will not be happy with services inflation — it’s been accelerating since April.”
The Fed’s goal is 2% annual inflation, something that the Fed hasn’t been able to achieve since inflation began taking off in early 2021.
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On a month-to-month basis, PCE inflation rose 0.3%.
Core inflation, which strips out volatile food and energy prices, was 2.9% on an annual basis. Core inflation was 0.2% on a monthly basis.
The new PCE numbers lag other gauges of inflation, including the consumer price index, which is the most closely watched inflation metric. CPI inflation was running at 2.9% in August. The producer price index report showed that annual inflation is at 2.6% for the year ending in August.
In addition to too-high inflation, the labor market has shown indications of softening, an unfortunate combination for the economy.
The economy added just 22,000 jobs in August, and the unemployment rate rose to 4.3%. Also, the July jobs report revealed that some 258,000 fewer jobs were added in May and June than previously reported.
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Last week, the Fed announced it was cutting interest rates for the first time in 2025, in large part because of the indications of a weakening job market. But in some good news, the economy has been expanding this year. After contracting in the first quarter, GDP growth increased by a robust 3.8%.
