US core PCE inflation rises 3% in August

The US Federal Reserve's preferred inflation gauge rose less than expected in August, with core inflation increasing 3% annually, according to data released by the Commerce Department on Wednesday.

The personal consumption expenditures (PCE) price index increased 0.3% in August, taking the annual increase to 3.4%. Economists had expected monthly and annual increases of 0.3% and 3.7%, respectively.

Excluding food and energy, the core PCE price index rose 0.2% for the month, with the annual rate at 3%. Economists had forecast increases of 0.3% and 3.3%, respectively.

The annual inflation readings were lower than expected after the Bureau of Economic Analysis changed the methodology used to calculate prices for legal services, software and computer accessories, and portfolio management.

The revisions lowered the core PCE reading for July by 0.36 percentage points.

The report also showed that personal income increased 0.2% in August, below the 0.4% consensus forecast, while consumer spending rose 0.9%, ahead of the expected 0.8% increase.

Both headline and core PCE inflation remain above the Fed's 2% target, leaving the possibility of further interest rate increases at the central bank's remaining meetings this year.

Energy costs were the main contributor to the monthly increase in prices. Gasoline prices rose 4.4%, while transportation services increased 1.4%. Energy goods and services prices climbed 2.3%.

Prices for both goods and services increased 0.3% during the month.

The latest inflation data reduced market expectations for an October Fed rate hike, although markets continued to price in the possibility of an increase in December.

In separate economic data, the Commerce Department reported that US Gross Domestic Product (GDP) increased at an annualised rate of 2.2% in the second quarter, according to the final of three estimates. The figure was sharply higher than the previous estimate of 1.5%, reflecting stronger contributions from consumer and government spending and investment.

Real final sales to private domestic purchasers, a measure closely watched by Fed officials as an indicator of underlying demand, increased 4.6%, an upward revision of 0.4 percentage points.

Inflation measures for the April-to-June quarter were also revised lower, with headline PCE inflation at 5% and core PCE inflation at 3%, both 0.3 percentage points below previous estimates.