Core PCE Inflation Cools to 2.8% as Household Spending Loses Steam — Evening Brief – 12.05.25 

Core inflation eased further in September, reinforcing expectations that the Federal Reserve is slowly winning its fight against persistent price pressures. The core Personal Consumption Expenditures (PCE) Price Index — the Fed’s preferred inflation measure because it captures shifting consumer behavior and strips out volatile food and energy prices — rose 0.2% month-over-month, matching consensus and August’s pace. Year-over-year, core PCE slowed to 2.8%, down from 2.9%, marking its lowest reading since May. 

The report, released later than usual due to delays tied to the recent government shutdown, also showed headline PCE inflation increasing 0.3% M/M and 2.8% Y/Y, with energy prices contributing modestly to the uptick. 

Beneath improving inflation data, however, the demand picture looked weaker. Personal spending grew only 0.3%, a meaningful step down from August’s revised 0.5%, as consumers scaled back on discretionary purchases. Real consumption — adjusted for inflation — was flat on the month, signaling that momentum is softening after a resilient summer. 

Meanwhile, personal income rose 0.4% M/M, supported by wage gains and stronger income from financial assets. But most of those income gains were absorbed by daily expenses: the personal saving rate ticked up only slightly to 4.7%, still well below its pre-pandemic average near 7–8%. 

The tug-of-war between easing inflation and cooling consumption highlights the Fed’s delicate calculus heading into 2026: rate cuts are becoming easier to justify, but any sharp deceleration in household spending — the engine of U.S. growth — could raise fresh recession concerns just as policymakers shift toward easing.