US inflation remained stubborn last month as Iran war continued to lift prices

By Alicia Wallace, CNN

(CNN) — Inflation remained stubbornly elevated in August as a war-driven energy shock continued to ripple through the US economy and Americans’ pocketbooks.

The Personal Consumption Expenditures price index – the Federal Reserve’s preferred inflation gauge – rose 0.3% from July, bringing the annual rate to 3.4%, unchanged from the month before, according to new data from the Commerce Department.

Inflation picked up on a monthly basis as fuel and other energy prices shot higher as a result of the war in Iran.

Excluding volatile food and energy prices, the closely watched core PCE price index rose 0.2% from July, staying at an annual rate of 3% for a third-straight month.

Despite stubborn inflation, a crucial economic engine continued to run smoothly: Inflation-adjusted spending was up 0.6% in August, the strongest monthly increase in more than a year.

While consumer spending has remained resilient, Americans have been drawing down their reserves in the process. The saving rate (savings as a percentage of after-tax income) dropped to 4.1% in August, a nearly four-year low.

“Households pinched by higher prices have been either reducing their monthly savings rate or relying more on credit,” Kathy Bostjancic, Nationwide’s chief economist, wrote Wednesday in a note.

The strength of the US labor market has helped to fuel spending, she noted.

“Employment growth has accelerated and broadened out, keeping the unemployment rate low,” she said. “Having a job enables confidence to keep spending despite inflation headwinds.”

Job growth has picked up this year following a historically weak showing in 2025. The latest monthly jobs report is due out Friday, and economists are expecting the US economy added 94,000 jobs in September, with a jobless rate staying low at 4.1%.

The August PCE report was expected to show some cooling in inflation because of some methodological changes the Commerce Department made to several key categories.

Every year, the Bureau of Economic Analysis updates its massive repository of national, industry and regional data to incorporate newly available statistics and more accurately capture changes in prices.

Economists estimated that the changes could lower the annual PCE inflation rate by a couple of percentage points. The latest report showed that July’s annual rate previously reported at 3.7% was revised down to 3.4%. The core index showed a similar reduction from 3.3% to 3%.

The PCE price index is part of the Commerce Department’s monthly Personal Income and Outlays report, which includes comprehensive data on how Americans earn, spend and save.

Personal income growth and disposable (after-tax) income growth both slowed a tenth of a percentage point in August to 0.2% and 0.3%, respectively. When adjusting for inflation, disposable personal income was flat.

This story is developing and will be updated.

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