The Fed’s main inflation measure will be released on Wednesday. Here’s what to expect

If anyone at the Federal Reserve is looking for evidence against another interest rate hike, they’re unlikely to find it in data due Wednesday, which is expected to show continued price pressures and consumers nonetheless continuing to spend.

The personal consumption expenditures price index, the main inflation indicator for central bank policymakers, is expected to show increases of 0.3% both at the overall level and at the core level, the latter excluding food and energy costs, according to the Dow Jones consensus.

On an annual basis, price levels are expected to show increases of 3.7% and 3.3%, respectively, unchanged from July and still well above the Fed’s 2% target.

In other words, there is no indication that inflation will decline in the near future.

“The Fed is going to look at this and say, ‘Hey, you know, the core isn’t moving, and I don’t have any expectations or anything that allows me to believe that it’s going to start coming back down convincingly,'” said Dan North, senior economist at Allianz Trade. “It’s still well above target… So I think it’s really priced in to the extent that the Fed won’t be able to ignore it or explain it away.”

At their September meeting, Fed officials approved a quarter-percentage-point rate hike and forecast the likelihood of another hike by the end of the year. All but two of the 18 Federal Open Market Committee officials who provided forecasts indicated they expected at least one more move in 2026 as they raised their consensus PCE inflation outlook.

Fed Chairman Kevin Warsh said at his news conference earlier this month that data on hiring, as well as business investment and private sector profits, showed the economy was in good shape.

“I would have a hard time characterizing the overall financial conditions as restrictive,” Warsh said. Financial conditions play an important role in how the Fed calibrates its rate policy.

Similarly, Fed Governor Michael Barr said Tuesday that the combination of tariffs and the protracted war with Iran means that “we have deviated from our progress toward our 2% goal.”

Moreover, he added, “I don’t yet see a clear trend toward a timely return to 2%.”

As a result, Barr reiterated his belief that the Fed will likely need to continue raising rates, although he did not specify a level. The September decision placed the central bank’s borrowing benchmark in a range of 3.75% to 4%.

“In my base case scenario, further policy adjustments will likely be necessary to ensure that inflation returns to its target in a timely manner,” he said. “We want to support sustainable, sustainable growth to support maximum jobs, and price stability is crucial for this.”

New York Fed President John Williams pointed to a third factor contributing to persistent inflation: the development of artificial intelligence and associated demand for related goods.

“Fortunately, other indicators are more encouraging regarding the inflation outlook,” he said. “Prices for housing services have slowed and there is no indication that the labor market is adding to inflationary pressures.”

Williams added that the pressure on goods prices from tariffs has largely eased.

From a political perspective, he spoke in more conciliatory terms than Barr, saying that “there is no emergency and we have time to gather more information.” However, he said he expects a “further upward adjustment” to rates will be necessary this year.

Wednesday’s release adds a difficulty to the inflation permutations: lower numbers in previous months due to revisions that the Bureau of Economic Analysis will apply retroactively.

More specifically, the BEA is adjusting its methodology to 2021 to measure the prices of legal services, computer software and accessories and portfolio management services. The result is that the annual PCE inflation figures for July will likely be revised downward by two or three-tenths of a percentage point, possibly bringing the 12-month figure down to 3%, according to various Wall Street estimates.

This could improve the appearance of the rearview mirror without necessarily changing the road, as the outlook remains cloudy.

Goldman Sachs, for example, expects inflation data over the coming months to be “somewhat less favorable before a more benign trend reasserts itself.”

Any decline will be a relief for consumers who, despite hesitant confidence indicators in a context of persistent price increases, continue to spend.

The Street consensus is that consumer spending rose 0.8% in August – the product, at least in part, of a further rise in gasoline prices. In July, the increase was only 0.2%.

Even with rising energy costs, Bank of America said spending remained strong.

Debt and credit card spending increased 6.9% year-over-year for the week ended September 19. Much of this increase was due to a 26.5% increase in gasoline prices. But even excluding gasoline, spending increased 5.7%.

For the Fed, this combination of persistent inflation and consumers still willing and able to spend offers little obvious reason to conclude that September’s rate hike did enough. Markets are pricing in a high probability of a rate hike in October, followed by another in December or January.