PCE Inflation Report Expected Today as Fed Faces Rising Pressure from Stronger Data

PCE Inflation Print Could Challenge Fed’s Rate Cut Outlook

Markets are bracing for Friday’s Personal Consumption Expenditures (PCE) report, with expectations that even a modest upside surprise could derail near-term rate cut bets. The release comes at a crucial time, as recent data has pushed back against the Federal Reserve’s dovish narrative, prompting traders to reassess the timing and scale of policy easing.

Stronger Growth and Jobs Data Undermine Dovish Case

Thursday’s revised U.S. GDP data showed second-quarter growth was stronger than initially reported, while jobless claims unexpectedly declined. New home sales surged 20% in August, signaling continued consumer resilience despite higher borrowing costs. The Fed now faces a more complicated backdrop as it attempts to balance progress on inflation with sustained labor market strength.

Kansas City Fed President Jeffrey Schmid added to the hawkish tone, stating Thursday that “inflation remains too high while the labor market, though cooling, still remains largely in balance,” and described current policy as only “slightly restrictive.” These remarks suggest limited urgency to begin cutting rates unless inflation shows more decisive improvement.

Tariff-Driven Inflation Risks Add Complexity

Goldman Sachs estimates that recent tariffs are contributing 0.10 percentage points to August’s expected PCE reading. Chief U.S. economist David Mericle sees inflation trending lower over time but warns that cumulative tariff effects are building. Goldman projects year-on-year PCE inflation rising to 3.2% by December before easing again in 2026.

Vanguard’s Josh Hirt cautioned that “modest goods inflation cooling” doesn’t signal an end to tariff pressures, while Preston Caldwell of Morningstar noted that tariffs are likely “flowing into the rest of the economy with a lag,” increasing uncertainty around core inflation dynamics heading into Q4.

Dollar Strength Reflects Market Repricing

The dollar index is on track for its strongest weekly gain in two months as traders pare back expectations for near-term Fed cuts.

CME FedWatch data shows the probability of an October rate cut slipping from 92% to 85.5% this week. Richard Flax, CIO at Moneyfarm, said Thursday’s data “likely argue against significant cuts to the policy rate in the coming months.”

Pre-release forecasts suggest headline PCE rose 0.3% in August (vs. 0.2% in July), while core PCE is expected at 0.21% monthly, down from 0.27%.

Outlook Hinges on Inflation Surprise Risk

Markets will be highly sensitive to any upside inflation surprise. Daniela Sabin Hathorn of Capital.com warned that traders want “more concrete evidence that inflation is cooling,” with equities and rate-sensitive assets exposed to disappointment. With core PCE still at 2.9%, well above the Fed’s 2% target, the bar for policy easing remains high.

A stronger-than-expected PCE print would likely reinforce current policy restraint, while a downside miss could revive dovish momentum—setting the stage for heightened market volatility into the weekend.

More Information in our Economic Calendar.