Fed's Key Inflation Gauge Stays Hot: Are Rate Cuts At Risk?

The Federal Reserve's preferred inflation gauge showed no signs of cooling in August, remaining stubbornly high and reigniting questions over whether the market’s aggressive rate-cut bets are truly justified.The Personal Consumption Expenditures price index — the Fed's go-to inflation metric — rose 2.7% on a year-over-year basis in August, according to data released Friday by the U.S. Bureau of Economic Analysis. That was slightly above July's 2.6% and marked the highest reading since February 2025. Monthly PCE inflation accelerated to 0.3%, from 0.2% in July.The Core PCE, which strips out volatile food and energy prices and is closely watched for its signal on underlying inflation trends, remained steady at 2.9% annually. On a month-over-month basis, it remained at 0.2%. Both figures matched analyst expectations.Spending Jumps, Income SolidAmerican consumers showed continued strength in August. Personal spending surged 0.6% from the prior month, exceeding expectations of 0.5% and notching the sharpest increase since March. That strength, however, may keep inflation sticky.Personal income rose by $95.7 billion, or 0.4%, beating estimates of 0.3%. The pace was identical to that of July, suggesting steady wage and income gains despite a high-interest-rate environment.Will The Fed Still Cut Rates In October?Despite inflation running well above the central bank's 2% target, markets have grown increasingly confident that the Federal Reserve will move ahead with interest rate cuts.According to CME Group's FedWatch tool, the probability of a 25-basis-point rate cut at the Fed's Oct. 29 meeting jumped to 88% following the report, up from 80% the day prior. Markets are also pricing in a 64% chance of an additional cut in December.Clark Bellin, president and CIO at Bellwether Wealth, said that while inflation is “still firmly above” the Fed's target, it appears “stable enough to handle lower interest rates.” He believes the Fed is on track to lower rates at the October meeting.Others agree, even as inflation pressures remain. Financial newsletter The Kobeissi Letter noted that while “PCE inflation is at its highest since February 2025,” the Fed “will keep cutting rates.”But not all see a clear path. Analysts at Schaeffer’s Investment Research noted that “strong demand keeps the economy steady,” yet warned that “labor cracks and tariffs” may complicate the Fed's next steps.Market Reaction: Stocks Move HigherInvestors appeared to take the inflation data in stride. Futures on the S&P 500 rose 0.5% in premarket trading on Friday. The Dow Jones Industrial Average gained 0.3%, and the tech-heavy Nasdaq 100 climbed 0.5%, as the in-line inflation figures supported the narrative of a rate cut.The Vanguard S&P 500 ETF (NYSE: VOO) is up 2.4% month-to-date. Read now: Trump Never Expected This—His Most-Hated Stocks Are Crushing Nvidia, Gold Miners Photo: Shutterstock