August Inflation Came in Cooler at 3.4%. Why Markets Cut October Hike Bets
U.S. PCE price inflation was 3.4% in August 2026 from a year earlier, below the 3.7% consensus estimate of economists polled by Reuters. The reading was published on September 30, 2026.
Stocks rose after the release on expectations the Federal Reserve might hold rates steady in October. Traders priced a roughly 35% chance of an October hike after the data, down from about 45% before, according to LSEG data. The Guardian
At 09:55 a.m. ET on September 30, the Dow Jones Industrial Average was up 50.58 points, or 0.10%, at 51,400.50. The S&P 500 was up 33.17 points, or 0.43%, at 7,704.01. The Nasdaq Composite was up 193.57 points, or 0.72%, at 26,991.11. Growth shares sensitive to rates led gains as Treasury yields eased from multi-year highs.
Days earlier, investors had priced in more than a 50% chance of another hike in October after the Fed's vote the prior week. New Federal Reserve projections had pointed to the policy rate reaching the 4.00%-4.25% range by the end of 2026.
The August data came from the Bureau of Economic Analysis release Personal Income and Outlays, August 2026. BEA Real personal consumption expenditures, or spending adjusted for prices, increased $92.8 billion, or 0.6% for the month. Personal income increased $66.6 billion, or 0.2% for the month. PCE, the Fed's preferred inflation gauge, tracks price changes across a wide range of consumer spending and adjusts when shoppers change habits.
In July, current-dollar spending increased $36.3 billion, with spending on services up $86.2 billion. Labor data arrived the same day. ADP reported private employers added 90,000 jobs in September, up from 36,000 in August. The yield on the 10-year U.S. Treasury was 5.246% on September 30, a day after hitting its highest level since June 2007.
On policy, the Federal Reserve raised interest rates in September, its first hike since 2023, lifting the benchmark rate to the 3.75%-4.00% range. Reuters As of September 10, the Fed had held its policy rate in the 3.50%-3.75% range since December. U.S. inflation had run above the Fed's target for 5-1/2 years at that point. Interest-rate futures, which work like bets on Fed decisions, had placed the odds of the September hike at 87%, up from 72% the prior day, after August consumer inflation data showed a 3.4% annual advance, unchanged from July. That CPI reading had followed a 3.4% advance in the 12 months through July, down from 3.5% in June.
The broader context here is a Fed weighing two risks without a clear lead. A cooler PCE reading supports a pause in October, especially with inflation-adjusted spending still expanding and payroll growth rebounding. Still, policymakers have signaled a higher end-year range, and long-term yields near 2007 highs show bond investors want more proof that inflation is contained. The soft print lowers near-term odds for action, but it does not reset the projected path to 4.00%-4.25% unless later jobs and CPI reports confirm slower price growth. October futures will likely stay volatile into those releases.
