Core services inflation holds at 3.35% after the BEA's PCE method change
Bureau of Economic Analysis revisions cut July's core-services PCE inflation by 34 basis points to 3.35%, partly via new methods for three categories. August came in at the same 3.35% on the new method, so the revision lowered the level of inflation without slowing it.
The Investor · Invest desk
What happened
- Under the new method, July's year-over-year rise in computer software and accessories prices fell to 12.3% from 21.2%, a spike Wolf Richter tied to the AI investment boom.
- Core PCE, the Fed's main yardstick, was revised down 37 basis points for July, to 2.98% from the originally reported 3.35%.
- The FOMC raised rates 25 basis points earlier this month, its first hike in five years, and a majority of members expect another later this year.
Why it matters
- What doesn't add up contradiction The near-target view from Waller and Hassett holds on the revised two-month pace of about 2.2% annualized and fails on the year-over-year core rate, up 3 basis points in August.
- Who has to decide decision The FOMC has to pick a window before its next meeting: year-over-year rates back the further hike Williams flagged, while only the halved July month brings the short-run pace near 2%.
- What it limits constraint With five years of history rewritten, year-end forecasts built on the old series start from a higher base than the data now shows, and comparisons across the revision mix two measures.
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On the revised series, core services prices rose 3.35% from a year earlier in July and 3.35% again in August [9]. Measured on one consistent method, the rate did not slow between the two months [20]. Core services are more than 60% of consumer spending [10]. At 3.35% they run 1.35 percentage points above the Fed's 2% target [19][1]. Wolf Richter, who reported the revisions, wrote that July's 34-basis-point cut came from "these methodological changes and other revisions" [9]. His account does not split the two.
Most of the other gauges rose in August. Core PCE went up 3 basis points from the revised July figure, to 3.01% [14][24], and the all-items index rose to 3.42% from a revised 3.36% [5]. Core goods were the exception, falling to 3.07% from a revised 3.61% in July, a 54-basis-point drop [12][25]. Core PCE has been above target since March 2021, and its closest approach on the revised history was 2.6% in April 2025 [4].
The case for taking the lower numbers at face value has senior backers. Fed Governor Christopher Waller said that "nonmarket services prices have always been an issue for me, since they are imputed and not actual price changes," and that "my take is that underlying inflation is doing better than the core numbers suggest" [15]. Richter lists the changed categories as portfolio management and investment advice, legal services, and computer software and accessories [3]. American Banker described the change as a new way of estimating nonmarket costs such as fees charged for financial services and insurance products [6]. Kevin Hassett, director of the White House National Economic Council, argued that if inflation over the last three months is running around 2%, and interest rates since the early 19th century have been about the inflation rate plus two, then there is not a lot of room for rates to go up from here [7].
The two monthly core readings in the release support part of that. July's revised increase and August's 0.25% compound to an annualized pace of about 2.2% [13][21]. August alone annualizes to about 3.0% [22]. The near-2% short-run figure depends on the July month the revision halved [13].
If the new method prices those fees more accurately, the old 3.69% overstated inflation and the revision corrected an error [9]. If monthly core prints settle near July's revised level, Hassett's short-run figure is right and the year-over-year rates follow it down over the next year. The third possibility is a one-time level shift, with year-over-year rates rising from a lower base as they did in August [14][5]. I think the evidence so far fits the third best, though the drop in core goods cuts against it [12]. A run of monthly core prints at or below about 0.165%, the pace that compounds to 2% a year, would prove that view wrong [23].
New York Fed President John Williams spoke in Buffalo on Tuesday, the day before the revisions came out [17][8]. "If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target," he said [17].
What to watch
- September core PCE: a monthly rise at or below about 0.165% would put the annualized pace at 2% and undercut the level-shift reading.
- September core services on the new method: any year-over-year reading below 3.35% would be the first slowdown on the revised measure.
- Friday's September jobs report, one of the releases due before the FOMC decides on the further hike Williams described.
Information, not investment advice. This story is general information about companies and markets, drawn from cited reporting. It is not a recommendation to buy, sell or hold any security; check the cited sources before acting.
Clarity's read
What the record supports and how the coverage leans. The claims behind it follow.
Reality
- Evidence62
- Adoption
- Not scored
- Hype gap+12
- Incentives45
- Confidence64
Perspective Coverage
3 publishers- Builder
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- Operator 25%
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Claim ledger
Ranked by verification strength, evidence, and original report placement.
- [1]
The PCE price index is the inflation index the Fed favors for its 2% inflation target.
- [2]
The BEA revises the PCE price index every year, and each year the data is revised for the past five years.
- [3]
The BEA changed its methodology for three PCE subcategories: portfolio management and investment advice services, legal services, and computer software and accessories. The first two lowered the core services index; the third lowered the core goods index.
- [4]
Core PCE has been above the Fed's target since March 2021; the closest it got was the revised +2.6% in April 2025.
- [5]
The all-items PCE price index rose 3.42% year over year in August, from a revised 3.36% in July; the revisions cut July's increase by 34 basis points from the originally reported +3.70%.
- [6]
The BEA revised how it estimates the cost of certain nonmarket costs, such as fees charged for financial services and insurance products, resulting in a lower overall reading.
- [7]
"If you think that the last three months inflation is running around 2%, and you think that since [the early 19th century] interest rates were about the inflation rate plus two, then you would argue there's not a lot of room to go up from here."
- [8]
Wednesday was the day for the annual revisions of the PCE price index.
- [9]
July's year-over-year core services PCE price index was cut by 34 basis points, from +3.69% to +3.35%, as a result of these methodological changes and other revisions. In August, on the new methodology, core services PCE also rose +3.35% year over year.
- [10]
Core services account for over 60% of consumer spending.
- [11]
Under the old method, the computer software and accessories subindex rose 21.2% year over year in July, driven by side effects of the AI investment boom; the revised July rate is +12.3%.
- [12]
Core goods PCE rose 3.07% year over year in August. July's rate was cut by 27 basis points to +3.61% from the originally reported 3.88%, due to the change in methodology for computer software and accessories.
- [13]
Core PCE rose 0.25% in August from July; July's previously reported 0.25% month-to-month increase was cut in half by the new methodology to +0.12%.
- [14]
Core PCE rose 3.01% year over year in August; July's year-over-year increase was cut by 37 basis points, to +2.98% from the originally reported +3.35%.
- [15]
"As you are probably aware, I don't like throwing out specific categories going into the estimate of PCE inflation, but nonmarket services prices have always been an issue for me, since they are imputed and not actual price changes. So, ignoring this one factor, my take is that underlying inflation is doing better than the core numbers suggest."
- [16]
The FOMC earlier this month raised interest rates by 25 basis points, the first increase in five years, and indicated that a majority of members expect another rate hike later this year.
- [17]
New York Fed President John Williams said at an event in Buffalo on Tuesday: "If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target."
- [18]
Several key economic indicators are due before the next FOMC meeting, including the September jobs report on Friday.
- [19]
Revised core services inflation of 3.35% is 1.35 percentage points above the Fed's 2% target.
- [20]
On the revised method, the year-over-year core services rate did not change between July and August.
- [21]
Revised July (+0.12%) and August (+0.25%) core PCE monthly increases compound to an annualized pace of about 2.2%.
- [22]
August's 0.25% monthly core PCE increase annualizes to about 3.0%.
- [23]
A monthly increase of about 0.165% compounds to 2% a year.
- [24]
Year-over-year core PCE rose 3 basis points from revised July to August.
- [25]
Year-over-year core goods inflation fell 54 basis points from revised July to August.
Sources
2 independent publishers whose own reporting we read for this story.
- americanbanker.comAugust PCE inflation comes in lower, but with a twist
1 article · September 30, 2026
- seekingalpha.comNot Even The Massive Changes Of Methodology Can Get PCE Inflation Back Into The Bottle
1 article · September 30, 2026
- wolfstreet.comNot Even the Massive Changes of Methodology Can Get PCE Inflation Back into the Bottle
1 article · September 30, 2026
Topics and entities
Topics
- US Monetary Policy
- Economic Data Revisions