The Fed doesn't think inflation will run amok again. The PCE price gauge will help clue us in.

By Jeffry Bartash

Inflation seen as peaking around 3% due to tariffs, then subsiding again

People shop at a supermarket in Montebello, Calif. Inflation has not returned to low prepandemic levels.

The Federal Reserve's preferred inflation barometer won't show a very worrisome increase on Friday, but investors want to know if there's any devil in the details.

The personal-consumption expenditures (PCE) price index is forecast to show a 0.3% rise in August, but a smaller 0.2% advance in the more closely followed core measure. The core rate strips out volatile food and energy costs and is a better predictor of future inflation.

Fed Chair Jerome Powell previewed the PCE report at a public event on Tuesday.

Calculations by the central bank's economists, he said, signaled the main index would show a 2.7% increase in the 12 months ended in August, up from 2.6% in the prior month.

The core rate would show a one-year increase of 2.9%, unchanged from the prior month.

Both of those Fed forecasts match up with the monthly Wall Street forecasts.

To be sure, inflation is running above the the Fed's long-run goal of 2% inflation. Yet Powell and other senior Fed leaders are relieved inflation hasn't risen as much as expected due to higher U.S. tariffs.

The Fed delayed any reductions in interest rates this year until it could get a better idea of how much the tariffs were contributing to inflation. So far, the effect has been small.

At the same time, though, the labor market showed increasing signs of stress. Hiring has fallen sharply, the unemployment rate has crept higher and it's taking people a lot longer to find work.

The Fed last week justified its first interest-rate cut this year by pointing to a weakening labor market. By law, the Fed is supposed to make sure inflation and unemployment are low.

While inflation has taken a back seat to the labor market, Fed officials are still monitoring inflation closely.

What they especially want to see is how much goods prices continue to rise and whether a recent uptick in services costs is just a blip.

Goods are most affected by tariffs, and prices have risen since the start of the year. Goods prices only rose 0.5% in the 12 months ended in July, but they had been actually declining for most of 2023 and 2024.

Until very recently, services prices had been slowing and keeping a lid on inflation. But they perked up in June and July to raise some red flags.

Most top Fed officials believe services costs will level off again, and they'll be looking for evidence in the August PCE report.

"Friday's PCE is the next key economic data point to watch," said Rick Gardner, chief investment officer at RGA Investments in Raleigh, N.C.

-Jeffry Bartash

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09-25-25 1246ET