The Fed's Favorite Inflation Gauge Shows Prices Up 3.4% Over the Past Year as Spending Jumps in August

Prices are still rising faster than the Fed wants, and Americans spent a lot more in August while saving only a small slice of their income.

The government released its monthly report on Americans' income, spending and prices on Wednesday, September 30. The report from the Bureau of Economic Analysis (BEA), part of the Commerce Department, includes the inflation gauge the Federal Reserve watches most closely.

According to the BEA, the personal consumption expenditures (PCE) price index rose 3.4% in August compared with a year earlier. Prices rose 0.3% from July to August.

What PCE inflation is

Inflation means prices rising over time. You may be more familiar with the Consumer Price Index (CPI), which is another way to measure it. The PCE price index is similar, but according to the Federal Reserve Bank of Cleveland, it covers a wider range of spending, including things paid for on your behalf, like employer-provided health insurance and Medicare. The Federal Reserve uses PCE for its 2% inflation goal.

The report also shows core PCE, which leaves out food and energy prices because they tend to jump around a lot. Economists watch core inflation to see the underlying trend. In August:

• PCE prices: up 0.3% from July and up 3.4% from a year earlier
• Core PCE prices: up 0.2% from July and up 3.0% from a year earlier

Both readings came in cooler than economists expected. According to Fox Business, forecasters had expected PCE prices to be up 3.7% from a year earlier and core prices up 3.3%. CNBC described the core reading as "much lighter than expected." Still, both are well above the Fed's 2% target.

One important note: the BEA said this report includes results from its annual update of the national economic accounts. That means earlier months' numbers were revised, so today's figures may not line up neatly with inflation readings reported before the update.

Spending jumped, income grew more slowly

Americans spent a lot more in August. Personal consumption expenditures, which is the total amount people spent on goods and services, rose $190.8 billion, or 0.9%. That included $114.1 billion more on goods and $76.7 billion more on services. After adjusting for inflation, spending rose 0.6%.

Income grew more slowly:

• Personal income: up $66.6 billion, or 0.2%
• Disposable personal income: up $68.6 billion, or 0.3%. This is what people have left after paying taxes.

The BEA said the income gain mainly reflected higher pay and government social benefits, such as Medicare and Social Security.

Saving is thin

The personal saving rate, which is the share of after-tax income that people save instead of spend, was 4.1% in August. In simple terms, for every $100 people took home after taxes, they saved about $4.10 on average.

When spending grows faster than income, households may be dipping into savings or using credit to keep up.

What this means for your wallet

A single report will not change your bills overnight, but it shapes decisions that do:

• Interest rates: The Fed raised its target rate in September to fight inflation. With PCE inflation still well above 2%, borrowing costs on credit cards and other variable-rate loans may stay high for a while. Paying down those balances could save you money on interest.
• Savings: Higher rates can be good news for savers. It may be worth checking whether your savings account is keeping up with what other banks pay.
• Your budget: If prices keep rising about 3% a year, the same groceries, rent and bills cost more over time. Reviewing your spending each month can help you catch where rising costs are creeping in.
• Your cushion: A low saving rate across the country is a reminder that many people have little room for surprises. Even small, regular transfers into savings can help build an emergency fund.
• Investments: Inflation and interest rate news can move stock and bond prices in the short term. For long-term goals like retirement, many people choose to stick with a steady plan instead of reacting to each report.