The Federal Reserve's preferred inflation measure climbed sharply in August, fresh evidence that price pressures remain stubborn even after the central bank's first rate hike in three years earlier this month.
The core personal consumption expenditures price index, which strips out volatile food and energy costs, rose faster than economists expected, according to data released Friday. The report lands just weeks after Fed officials voted to raise their benchmark interest rate, signaling they are not done fighting inflation.
The core PCE index is the gauge Fed Chair Jerome Powell and his colleagues watch most closely when setting policy. Unlike the consumer price index, it adjusts for changes in consumer behavior as prices shift, giving policymakers a cleaner read on underlying inflation trends.
Markets have been watching for signs that inflation is cooling. August's reading offered little comfort. Prices for services, housing and other core categories continued to climb, keeping the annual rate well above the Fed's 2 percent target.
"The data confirm that inflation is not going away quietly," said one economist briefed on the report, who spoke on condition of anonymity because the analysis was not yet public. "The Fed has more work to do."
The central bank raised rates earlier this month for the first time since 2018, ending a three-year stretch of near-zero borrowing costs. Officials framed that move as a first step, not a final one, and the August inflation data reinforce that stance.
Higher rates ripple through the economy. They push up borrowing costs for mortgages, credit cards and business loans, cooling demand but also slowing growth. The Fed must balance that against the risk of tipping the economy into recession.
Powell has said repeatedly that the Fed will use its tools to bring inflation down, even if the process causes short-term pain. Friday's report gives him and other officials more ammunition to justify additional hikes at upcoming meetings.
Consumer prices have risen across a broad range of goods and services this year. Supply chain disruptions, strong demand and labor shortages have all contributed. The war in Ukraine has added pressure through higher energy and food costs.
Economists surveyed before the release had expected core PCE to moderate slightly. The stronger-than-expected reading caught forecasters off guard and pushed bond yields higher as traders bet on a more aggressive Fed path.
Attention now turns to the Fed's next policy meeting, where officials will weigh the August data alongside employment and wage figures. Another rate increase is on the table if inflation does not show clear signs of slowing.
