August Core PCE and Revisions Come in Dovish but Still Plenty of Heat
- The August core PCE print and historical revisions to that data (details from the BEA here) both came in somewhat more dovish than expected. This was due to larger than expected downward revisions to non-market services prices that tend to be more opaque and less cyclically relevant than other areas.
- These revisions should mechanically take the Fed’s ’26 core PCE forecast down to roughly 3.1%.
- Given the non-market sources of these revisions and the Fed’s general knowledge of them at the September meeting, beyond attenuating October hike odds, we wouldn’t place too much emphasis on this print for the Fed.
- Real GDP growth was notably revised higher in ‘26H1 and should mechanically raise the Fed’s forecast for this year by at least 30bps to 2.6% with upside risks.
- Nominal spending trends remain very strong and after a bit of summertime slowdown August’s PCE spending data grew at an almost 11% m/m saar pace. Nominal core spending is growing at or above 6% in recent months.
A More Dovish than Expected PCE Revision Won’t Shift Fed Policy Baselines Near-term
Parsing the core PCE data for August and the broader recent trends is notably complicated by the benchmark revisions. Those revisions were driven by shifts in the noisy non-market categories which do matter because they impact topline inflation reads but are also less cyclical and noisier and often given a bit less weight than the signal from the market-prices only components of the PCE data. The revisions were notably larger than expected with our read of consensus expected a 3.2% post-revision core PCE print and we got 3.0%.
For core PCE excluding non-market prices, the revisions are basically a wash but the recent topline prints had also been a bit less problematically hot (not that 3% is a great inflation number). August’s core services ex housing and non-market prices, sometimes cited as the least noisy cyclical signal in the inflation data, was the hottest m/m print since summer 2022 and has shown much less disinflationary progress (in that it has moved notably higher) than other measures across the last few years when making allowances for tariffs and the war.
Fed officials have not been particularly clear if their Sept SEP forecasts included the revisions, but it seemed unlikely that they had with 3.4% as their baseline. They would have been aware of them, which means that their policy action reflected something like the 3.2% consensus and staff estimates for core PCE. Given the broader cyclical shifts at the Sept meeting it seems highly unlikely to me that the Fed would have not hiked if it had this data in hand at the time of the meeting given the underlying changes in the outlook and risk balance. I would similarly discount those who are saying that inflation is now at target based off the past 3m of core PCE data, which does look much more benign now at a topline level but residual seasonality concerns, temporary disinflation from tariff refunds, and shifting inflation risks should add great caution to that short-term good news.
The Growth Data is Unambiguously Hotter
The activity side of the August data and positive revisions across recent history paint notably modestly picture of the economy. Real GDP growth in Q2 was revised up to 2.2% from 1.5%, and Q1 was revised up from 1.2% to 2.5%. Nominal growth remains too strong overall, even though it is largely expected to cool some from its current pace as the year goes on although nowcasts for Q3 suggest a bit of caution on that point. Given that the labor market data don’t point to substantial negative revisions, these figures imply notably stronger productivity growth in recent quarters and attenuate, although not fully eliminate, some of the cautions there.
After a somewhat slower summer, personal spending was extremely strong in August. Nominal core spending growth saw a roughly 10% m/m saar pace and is growing at or above 6% on a trend basis. This pace of growth seems inconsistent with inflation’s return back to target over time barring a move higher in productivity growth to its fastest ever sustained pace, given that labor supply growth is so slow at the moment.
The income data was also revised up by a bit more than 1% cumulatively across its recent history, with much of the growth rate revision farther back in time given the source data which is incorporated into the benchmark revisions. The main effect of this was to substantially raise the savings rate across 2023-25. This chronic pattern of lagging upside revisions is one of the reasons we have been and remains very cautious, bordering on actively hostile against, savings rate based views of an inevitable consumer retrenchment. Current nominal earned income growth is notably slower (4-4.5%) than spending trends but consumer credit and net worth trends do not suggest that that is unsustainable over any reasonable forecast horizon and much of the gap may be closed by revisions in time.
