Economic Weekly

August PCE Inflation Likely a Glass Half Empty for the Fed

The Week Ahead

The September jobs report is forecast to show a good increase in payroll employment, pushing the unemployment rate down to the lowest since early 2025. Unemployment among recent graduates likely retreated as more members of the Class of 2026 found footholds in the workforce, but this demographic will remain a soft spot for the job market. Wage growth likely was modest and lagged the CPI (The September CPI report will be released in mid-October).

With the job market looking balanced, the Fed is squarely focused on controlling inflation. Their policymakers will likely see the August PCE inflation report as a glass-half-empty. Benchmark revisions to GDP and PCE that will be included in the report are expected to lower inflation’s trend in the last few months. On the other hand, both total and core PCE inflation likely held unchanged in August from July in year-over-year terms. If so, the reports are unlikely to sway financial markets’ expectations for the Fed to hike rates again at one of their next meetings. The September CPI and PPI reports will have more bearing on the Fed’s late October decision, as will developments in the Middle East and fuel prices at the pump.

Last Week in Review

Long-term bond yields rose to the highest in nearly 20 years last week as the retail price of diesel hit a new record high. Other important energy, metals, and agricultural commodity prices trended higher last week, too, contributing to the rise in interest rates. Fed Chair Warsh mentioned higher commodity prices as one motivation for the Fed’s mid-September rate hike, so commodities’ continued march higher adds to expectations for more hikes and raises longer-term bond yields. That is a renewed headwind for interest rate-sensitive industries like housing, but probably not enough to slow the AI boom. Investment in AI infrastructure could slow if businesses begin to second guess the outlook for spending on AI tokens, computing power, data centers, or software services. By comparison, a quarter percentage point move from the 10-year Treasury yield has less influence on the AI investment outlook.

New home sales rose more than expected in August, reaching the highest level since last December. Even so, sales so far in 2026 are down 2.9% from 2025. Listings are elevated relative to sales, pressuring builders to compete on price: The median sale price fell 5.8% on the year in August and the average sale price fell 8.8%. Housing sales will likely be softer this fall and winter if last week’s increase in mortgage rates persists.