The Federal Reserve's preferred inflation gauge came in below expectations in August. Technical revisions, not easing price pressures, drove the decline.

Annual national accounts revisions from the Bureau of Economic Analysis lowered July headline PCE inflation to 3.4% (from 3.7%) and core PCE to 3% (from 3.3%). Both rates held steady in August, with monthly core PCE rising 0.2%, below the 0.3% consensus.

Traders quickly dialed back rate-hike bets, pushing the odds of an October Fed rate increase down to 37.1% from 70.9% last week, according to the CME FedWatch tool. Economists, however, aren't so sure.

Much of the Revision Came From Technical Changes

Michael Pearce, chief U.S. economist at Oxford Economics, said the downward revision mostly reflects improvements in how computer software and portfolio management fees are measured.

"The changes were well telegraphed and Fed officials will have accounted for most of this already in their outlooks," Pearce said.

Peter Williams, economist at 22V Research, said the revisions were concentrated in non-market services, prices that are not observed directly in transactions and tend to be noisier.

Consensus expected core PCE at 3.2% after the revisions, according to Williams. The print came in at 3%.

Beyond reducing the odds of an October hike, Williams "wouldn't place too much emphasis on this print for the Fed."

One Measure Moved the Other Way

Services prices excluding energy and housing, which the Fed uses to track wage-driven inflation, rose 0.4% in August from 0.1% in July, according to BEA data.

Williams said a narrower version of that measure, which also strips out non-market prices, posted the hottest monthly reading since summer 2022.

"You don't need your glasses on to tell the difference between 3% core PCE inflation and a 2% target," Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, said.

Adams added that the Fed wants inflation to fall because price pressures are easing, "not because the way it's measured changes."

Growth Was Revised Higher

Real gross domestic product growth in the second quarter was revised up to 2.2% annualized from 1.5%. First-quarter growth was revised to 2.5% from 1.2%, according to Williams.

Pearce said most of the gains came from sectors exposed to artificial intelligence, including IT equipment, data centers and research and development.

Consumers kept spending. Personal spending rose 0.9% in August, while income grew only 0.2%, below the 0.5% consensus. As a result, the saving rate fell to 4.1% from 4.6% in July, the lowest since late 2022, according to Adams.

Meanwhile, ADP reported that private employers added 90,000 jobs in September, above forecasts.

Treasury yields reversed the initial drop after the data.

The two-year yield, the most sensitive to Fed rate expectations, was little changed at 4.89% by early afternoon, while the 10-year rose about 5 basis points to 5.30% and the 30-year about 5 basis points to 5.65%.

The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) fell 0.82% to $77.59 and the iShares 7-10 Year Treasury Bond ETF (NASDAQ:IEF) lost 0.32%, while the short-term iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) was flat at $81.18.