The Federal Reserve’s preferred inflation gauge ticked up in August, adding a fresh wrinkle to the ongoing debate over the health of the U.S. economy and the direction of interest rates. According to a report released Friday by the Commerce Department, the personal consumption expenditures (PCE) price index—the central bank’s go-to measure for inflation—rose 2.7% in August 2025 compared to a year earlier. That’s a modest uptick from the 2.6% year-over-year rise recorded in July, and it marks the fastest annual pace since February. While the increase was largely in line with economists’ expectations, it’s enough to keep policymakers, investors, and consumers on edge.
Digging deeper into the numbers, the so-called core PCE inflation—which strips out the volatile food and energy categories—climbed 2.9% from August 2024, matching the pace set in July. On a month-to-month basis, prices rose 0.3% from July to August, slightly above the 0.2% increase seen the previous month. Core prices, meanwhile, advanced 0.2% for the second month in a row. These figures suggest that, while inflation has eased from the blistering highs of recent years, it remains stubbornly above the Federal Reserve’s 2% target—a threshold that has become something of a holy grail for central bankers.
"The resilience of the US consumer was on show once again," wrote Michael Pearce, an economist at Oxford Economics, in an analysis of the report. However, Pearce cautioned that this strength "is being driven by households at the top of the income distribution." In other words, while headline numbers look robust, much of the spending power is concentrated among wealthier Americans—a trend that could have longer-term implications for economic growth and inequality.
Indeed, the Commerce Department’s report showed that inflation-adjusted consumer spending rose a healthy 0.4% from July, mirroring the previous month’s gain. This increase was fueled primarily by a 0.7% jump in spending on goods, while spending on services—such as travel and dining out—rose just 0.2%. Incomes also advanced 0.4% in August, with self-employed individuals and business owners seeing a 0.9% boost for the second month running. Wages and salaries, however, inched up only 0.3%, a slowdown from the 0.5% increase recorded in July.
These mixed signals come at a pivotal moment for the Federal Reserve. After raising its benchmark interest rate 11 times in 2022 and 2023 to combat runaway prices, the central bank made its first rate cut of 2025 just last week. The move was designed to ease borrowing costs and support a U.S. job market that has shown signs of deterioration in recent months. Still, the Fed has been cautious about further reductions, opting to wait and see how President Donald Trump’s sweeping tariffs on imports will affect inflation and the broader economy.
President Trump, for his part, has not been shy about weighing in on monetary policy. For months, he has publicly urged the Fed to slash rates more aggressively, often using colorful language to criticize Fed Chair Jerome Powell. Trump has called Powell "Too Late" and a "moron," and has argued—contrary to the government’s own data—that there is "no inflation." The president’s pressure campaign has injected an unusual degree of political drama into what is typically a technocratic process.
Last month, Trump escalated his efforts to assert control over the central bank by attempting to fire Lisa Cook, a member of the Fed’s governing board. Cook, who has challenged her dismissal in court, remains in a legal limbo as the Supreme Court prepares to decide whether she can stay on the job while her case works its way through the judicial system. The outcome could have far-reaching implications for the Fed’s independence and the balance of power between the executive branch and the central bank.
All of this unfolds against a backdrop of persistent, if diminished, inflationary pressures. The PCE price index remains the Fed’s favored gauge in part because it accounts for changes in consumer behavior as prices rise. Unlike the more widely cited consumer price index (CPI), the PCE can track when shoppers switch from expensive national brands to more affordable store brands—a subtle but important way to capture the real-world impact of inflation.
But while the PCE’s methodology provides a nuanced look at consumer habits, the broader story remains the same: inflation is down from its peak, but not yet tamed. The Fed’s 2% target continues to hover just out of reach, forcing policymakers to walk a tightrope between supporting economic growth and keeping price increases in check.
For everyday Americans, the stakes are high. Rising prices have eroded purchasing power, especially for those on fixed incomes or in lower-income brackets. While high-income households continue to drive much of the new spending, many families are still feeling the pinch at the grocery store, the gas pump, and virtually everywhere else. The recent slowdown in wage growth only adds to the sense of unease.
Meanwhile, the political battle over the Fed’s direction shows no signs of abating. Trump’s efforts to oust Lisa Cook and his ongoing attacks on Jerome Powell have raised questions about the central bank’s ability to operate free from political interference. Supporters of the Fed’s independence warn that undermining the institution could have dangerous consequences for the economy, while Trump’s backers argue that more aggressive action is needed to spur growth and bring relief to struggling Americans.
As policymakers, economists, and ordinary citizens alike try to make sense of the latest data, one thing is clear: the path forward is anything but certain. The interplay between inflation, interest rates, political maneuvering, and consumer behavior will continue to shape the economic landscape in the months ahead. For now, all eyes remain on the Federal Reserve—and on the numbers that, for better or worse, tell the story of America’s economic fortunes.
With the PCE index showing only a slight acceleration and the Fed’s policymakers treading carefully, the next chapter in the inflation saga will likely be written as much in the halls of government as on Main Street. The choices made in the coming weeks and months could determine whether the U.S. economy finds its footing or faces new headwinds on the road ahead.
