Inflation Cooled More Than Expected, but the Government Changed How It Measures Prices
August inflation came in well below forecasts, but a quiet change in how the government counts service prices may deserve the credit. Here is what that means for the Fed's October decision and the rate-sensitive assets in your portfolio.
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Core prices in the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 0.2% in August against the 0.3% economists expected. The annual core rate of 3.0% was below a 3.3% forecast. The government released the report on September 30, 2026.
CME FedWatch odds of an October rate hike fell to 34.9% after the report, down from 70.9% one week earlier. That shift matters if you own bonds, dividend stocks, or anything tied to mortgage rates, because the Fed already hiked at its September meeting, but the same release changed how the government measures several service prices, and long-term Treasury yields kept rising anyway.
What the August Report Showed
Headline PCE, which includes food and energy, was up 0.3% for the month and 3.4% from a year earlier, under a 3.7% forecast, while core inflation over the three months through August ran at about a 2.0% annualized rate.
That run rate matches the Fed’s 2% target and is the best argument against another hike. Energy remains the pressure point, up 16.85% from a year earlier in the government’s component data, while food rose just 1.92%.
How New Measurement Rules Shaved the Numbers
The revised measurement for investment advice, legal services and computer software reaches back to January 2021. Prices for these services are hard to observe, so a new estimation method can move the index on its own.
The revisions cut core inflation by about 0.3 percentage points, which suggests much of the downside surprise came from the new method. Stephen Brown, an economist at the firm, wrote that “core price pressures are slightly less firm than feared,” a modest shift.
Why the Fed May Still Hike in October
The Bureau of Economic Analysis raised its estimate of second-quarter GDP growth to 2.2% from 1.5%. Moreover, ADP private payrolls rose by 90,000 in September against roughly 70,000 expected, and the 10-year Treasury yield hit its highest level since 2002 on September 30, the day of the report.
Treasury data put the 10-year at 5.29% that day. Bill Adams of Fifth Third said the October decision is “still in play.” New York Fed President John Williams said on September 29 that “with the policy action we took at our September meeting, there is no need for urgency,” which suggests patience without ruling out another move.
The September jobs report is due October 2, 2026, and the next Fed meeting is October 27-28, 2026. A better payroll number would likely raise hike odds, because the methodology boost was a one-time adjustment.
What Rate-Sensitive Stocks Need From the Bond Market
The bull case rests on the three-month core pace sitting at target and hike odds falling inside a week. Homebuilders, utilities, and real estate investment trusts are among the groups most sensitive to interest costs if the Fed stops here.
Our view is that rate-sensitive stocks likely stay under pressure until the bond market agrees with the PCE report, while Treasury bills yield 4.02% at one month without exposure to long-term rate swings. That view is wrong if the 10-year closes back under 5% and FedWatch odds stay low after the October 2 jobs report.
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Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.
