US PCE inflation holds at 3.4% in August as markets trim Federal Reserve rate hike odds
The US personal consumption expenditures price index rose 3.4% year-on-year in August, easing pressure on the Federal Reserve as financial markets lowered expectations for an October interest rate increase.
Inflation data and interest rate expectations
The US Department of Commerce reported on Wednesday that the personal consumption expenditures (PCE) price index increased by 3.4% year-on-year in August 2026. The reading came in below the 3.7% forecast from economists surveyed by Reuters, aided by annual statistical revisions that adjusted June and July figures down to 3.5% and 3.4%. Core PCE inflation, which excludes volatile food and energy components, cooled to 3.0% from 3.3% in July. The deceleration reduced expectations for further monetary tightening by the Federal Reserve, which lifted its benchmark policy rate to a range of 3.75% to 4.00% in mid-September. Financial markets tracked by the CME FedWatch tool lowered the probability of a 25-basis-point rate increase in October to approximately 37%, down from 51% a day earlier. Federal Reserve Bank of New York President John Williams indicated that the central bank could take additional time before deciding on another rate increase.
- 2026-06
- 3.5 %
- 2026-07
- 3.4 %
- 2026-08
- 3.4 %
Mixed finish across equity markets
Trading on Wall Street ended with divergent results across major indices following the morning inflation release. The Dow Jones Industrial Average dropped 0.9% to finish at 50,906 points, and the S&P 500 index declined 0.3% to close at 7,651 points. In contrast, the technology-focused Nasdaq Composite index gained 0.2% to end at 26,861 points, supported by strength in artificial intelligence hardware and infrastructure companies. For the third quarter of 2026, the Dow logged a 2.7% decline, while the S&P 500 rose 2.0% and the Nasdaq advanced 2.5%. European equities retreated during the session, with Germany's DAX falling 0.8% to 25,199 points as September consumer price data showed annual inflation reaching 3.3% in Germany and 4.1% in Italy.
- Dow Jones
- -2.7 %
- S&P 500
- 2 %
- Nasdaq
- 2.5 %
Economic growth and labor data
Broader macroeconomic data released on Wednesday indicated ongoing momentum in the US real economy. Private sector employment increased by 90,000 jobs in September according to the ADP national employment report, surpassing the 70,000 consensus estimate and an upwardly revised 36,000 additions in August. Manufacturing activity in the Midwest expanded rapidly, with the Chicago Purchasing Managers' Index jumping to 58.8 points in September from 47.1 in the prior month. Second-quarter annualized gross domestic product growth was also revised upward to 2.2%, supported by private consumption and investments in artificial intelligence infrastructure. Anthony Saglimbene, chief market strategist at Ameriprise Financial, described how market participants are tracking whether corporate profits can withstand the elevated rate environment.
Then you would see a very fast negative reaction from the market.
Energy pressure on government bond yields
Despite the softer morning inflation figures, energy costs exerted upward pressure on sovereign debt yields late in the trading session. North Sea Brent crude futures rose above 1% to nearly $104 per barrel for November delivery, and US West Texas Intermediate crude increased 0.5% to approximately $90 per barrel due to the ongoing conflict between the United States and Iran. These elevated fuel and diesel prices led 30-year US Treasury yields to touch 5.62%, matching levels last recorded in 2002. Yields on benchmark 10-year and 2-year government bonds also climbed back toward recent highs after an initial dip. Market focus now turns to remarks from six Federal Reserve officials later this week and the official US government non-farm payrolls report scheduled for Friday.
