New inflation report may have major impact on your wallet

The sticker shock zapping your wallet while buying beef for the Labor Day cookout (thus prompting that menu switch to chicken) is linked to whether the Federal Reserve will cut interest rates next month.

So does all that buzz around the White Houses controversial tariffs.

Yep. Its all about inflation.

Heres why the upcoming Personal Consumption Expenditures (PCE) Price Index moves not only markets, but also the high interest rates on those credit cards you use to buy groceries like chicken wings (instead of ribs).

Why the Fed loves the PCE

The Federal Reserve relies on the PCE, not the Consumer Price Index (CPI), to set interest rates.

Heres why it matters for investors, consumers, and the next move in monetary policy:

• The PCE may not create as much buzz on Main Street as the CPI, but on Wall Street and inside the Federal Reserve, its the statistic that counts most.
• Published monthly by the Bureau of Economic Analysis, PCE measures the prices of goods and services that U.S. households consume.
• It covers everything from food to rent to health care, capturing a broader picture of the economy than does CPI.
• The Fed has explicitly tied its 2% inflation target to PCE, making each release a key driver of interest rate expectations.

“PCE is the single most important inflation data point for the Fed,” Morgan Stanley Chief Economist Michael Gapen said. “Markets cant afford to ignore it because a surprise here changes the entire interest rate outlook.”

Why PCE over CPI?

At the heart of the distinction is methodology:

• CPI tracks a fixed basket of goods and services, ignoring how consumers shift spending when prices rise.
• PCE, in contrast, adjusts for those substitutions.
• If beef prices spike, households might buy chicken instead. PCE reflects that shift, while CPI still measures beef.
• PCE's flexibility gives it a reputation as a more realistic gauge of inflationary pressure.
• PCE also includes expenditures made on behalf of households, such as employer-sponsored health insurance, further broadening its reach.

Stock market reactions: why investors care

For traders, the PCE report is a market-moving event. Because the Feds dual mandate centers on balancing maximum employment and stable prices, PCE anchors the price stability/inflation side.

• Hotter-than-expected PCE readings:Treasury yields spike, stocks often sell off, and the dollar strengthens on expectations the Fed will keep rates elevated.
• Cooler-than-expected PCE readings:Bonds rally, equities climb, and investors price in earlier rate cuts.

Why the PCE matters now

With inflation easing from its 2022 peak but still above 2%, the PCE remains the Feds navigation guide to interest rate cuts.

Markets are watching to see if that price growth is cooling enough to justify rate cuts later this year.

For households, CPI may still feel more relatable.

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• White House taps more potential candidates to head the Fed
• White House expands search to replace Fed Chair Powell
• Trump makes surprise decision on Federal Reserve

But for the Federal Reserve, the U.S. monetary policymakers charged with balancing economic growth and stable prices, the PCE vibes count.

The Fed last cut rates in December. It has been keeping the key Federal Funds Rate steady at 4.25% to 4.5% to “wait and see” the impact of tariff inflation on the economy.

As Gapen noted, “The Fed isn‘t trying to measure how inflation feels. It’s trying to measure how inflation actually operates in the economy. Thats why PCE rules the day.”

The Fed opens the door to September interest rate cut

Fed Chairman Jerome Powell indicated Aug. 22 that the Fed could begin reducing interest rates if the labor market continues to soften, while still “proceeding carefully.”

Markets interpreted that as a green light for a September cut in the benchmark Federal Funds Rate if the Aug. 28 PCE and the July jobs numbers on Sept. 5 dont reaccelerate.

Economists, including Morgan Stanleys Gapen, have also shifted to expecting a 0.25 percentage point September cut in the Federal Funds Rate.

CME Group's widely watched FedWatch Tool says theres an 85.1% chance that there will be a quarter-point cut in the funds rate when the Fed's policy-making Federal Open Market Committee meets Sept. 16-17.

Fed Governor Christopher Waller, in remarks on Aug. 28, once again called for a 0.25 point rate cut in September plus one in December followed by four additional quarter-point cuts in 2026. Waller cited the weakening labor market.

July PCE data on inflation raises eyebrows

• In the 12 months through July, PCE inflation increased 2.6% as expected after climbing 2.6% in June, the Commerce Department reported on Aug. 29.
• Stripping out the volatile food and energy components, the so-called core PCE Price Index increased 0.3% last month.
• That followed a 0.3% rise in the core inflation in June.

PCE and you: The Circle of Life

The Federal Funds Rate sets the pace for interest rates in the United States.

In short, it represents the nations cost of borrowing money.

So were back to grocery shopping with credit cards, then going home to pay the monthly car and student loan bills before lighting up the grill (also bought with those plastic cards in your back pocket or backpack).