Core PCE – What To Expect – 26.9.25

On Friday, 26 September 2025 at 13:30 UK time, the BEA releases the August personal income and outlays report, the Fed’s preferred inflation gauge and the cleanest read on consumer momentum. Our base case is Core PCE +0.2% m/m, Personal Income +0.3% m/m, and Personal Spending +0.6% m/m. This view reflects the August CPI–to–PCE translation (lighter shelter weight in PCE, mixed airfare/medical dynamics), the drag from weaker PPI trade margins on goods prices, steady but unspectacular labor-income growth, and firm nominal spending signals from retail sales/control. The aim here is to frame where consensus may be leaning too hard (risk of core PCE printing 0.2% not 0.3%) and where demand may surprise to the upside (spending closer to 0.6% than 0.3%–0.5%), with an eye to the policy and market implications.

Our call (MoM, seasonally adjusted)

• Core PCE: 0.2% (street 0.2%, forecast 0.3%)
• Personal income: 0.3% (street 0.3%)
• Personal spending: 0.6% (street 0.5%, forecast 0.3%)

Why:

Core PCE – 0.2%

• CPI core was +0.3% m/m, but the mix argues for a softer PCE translation: shelter rose +0.4% and was the biggest CPI driver; PCE gives shelter a much smaller weight than CPI, so that oomph fades in PCE. Offsets: medical care fell in CPI (-0.2% m/m), and airfares jumped, but airfares in PCE lean on PPI where prices were softer in August. Bureau of Labor Statistics
• PPI trade margins fell -1.7% m/m and headline PPI was -0.1% m/m. That tends to pull down PCE goods prices via distribution margins. Net of food/energy/trade, PPI was +0.3%, but the margins drop is the swing factor keeping core PCE nearer 0.2 than 0.3. Bureau of Labor Statistics
• Cleveland Fed’s mapping (conceptually) points the same way: with CPI core at +0.3% and PPI signals mixed, the nowcast drifts toward 0.2% for core PCE.

Personal income – 0.3%

• Wage & salary proxy: payrolls were +22k in Aug, average hourly earnings +0.3%, and hours were flat – private aggregate payrolls roughly +0.3%. That usually lines up with PI +0.3%, with upside risk from interest/dividend income but some offset from softer proprietors’ income.
• 

Personal Income

Personal spending – 0.6%

• Nominal goods momentum was firm: retail sales +0.6% m/m, and the control group +0.7%, both stronger than expected. That’s a decent guide to PCE goods in current dollars.
• Services prices/volumes likely positive: CPI showed food away from home +0.3%, lodging +2.3%, and airfares +5.9% (with PPI airfares softer, but nominal PCE still likely supported). Net: PCE current-dollar spending looks closer to 0.5–0.6%, not 0.3%. I’ll print 0.6% with a small downside tail to 0.5%.

Cross-checks & Context

• CPI August: headline +0.4% m/m; core +0.3%; shelter +0.4%; food at home +0.6%; gasoline +1.9%; medical care −0.2%. These specifics explain the softer CPI – PCE translation this month. Bureau of Labor Statistics
• PPI August: final demand −0.1% m/m on lower trade margins (−1.7%); “core” (ex-food/energy/trade) +0.3%, again, a mix that points to lower core PCE than CPI core. Bureau of Labor Statistics
• Labor income: AHE +0.3% m/m, hours flat, payrolls +22k – modest wage bill growth (in line with income +0.3%). Bureau of Labor Statistics+1
• Consumer sentiment/inflation expectations: University of Michigan prelim September sentiment dipped; 1-yr inflation expectations 4.8%, long-run 3.9%—doesn’t preclude spending, but flags sensitivity to price levels.
• Fed backdrop: FOMC cut 25 bps last week; a 0.2% core PCE would validate the “glide path” narrative; a surprise 0.3% would complicate it.

Market Take

• Baseline (core PCE 0.2 / spend 0.6): mixed: inflation-friendly but demand-firm. Front-end yields slightly lower to flat, belly steadier, USD mildly bid vs. low-beta FX on growth resilience but softer vs. JPY/CHF on the disinflation read.
• Disappointment risk: if core PCE 0.3%, expect a hawkish wobble—2s up, belly bear-flattening, USD firmer; equities less cheerful.
• Weak demand scenario: if spending ≤0.3% with core 0.2%, duration bid and USD softer broadly on growth concerns.

Bottom line

• We disagree with a 0.3% core PCE call; the CPI/PPI mix argues 0.2%.
• We’re in line with income +0.3%.
• We disagree with a soft spending +0.3% – retail/control and services pricing point to 0.6%.

Conclusion

Netting everything up, the most probable tape is inflation-friendly but demand-resilient: Core PCE at 0.2% (in line with consensus, softer than some desk calls), income at 0.3%, and spending at 0.6% (above consensus). If realized, that mix supports the Fed’s disinflation glide path while signaling that consumption remains healthy—typically a modest bull-flattener or steady belly in rates, USD mixed (firmer vs. cyclicals on growth, softer vs. JPY/CHF on disinflation), and a constructive backdrop for risk unless core surprises at 0.3%. The key things to watch in the release tables: (1) supercore services (ex-housing) momentum, (2) trade margins within PCE goods, (3) healthcare services and imputed components, (4) real PCE and the savings rate, and (5) any revisions to prior months. Upside risk is a stickier 0.3% core; downside risk is spending ≤0.3%. Barring those tails, Friday’s print should validate a “slower inflation, steady demand” narrative.

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