August Core PCE Price Index Rises 2.9%, Matches Forecast, Reveals Sector Divergence

The August Core PCE Price Index, released on August 29, 2025, confirmed a persistent inflationary divide in the U.S. economy. At 2.9% year-over-year, the index matched forecasts but underscored a critical shift: services inflation now dominates the inflation narrative, while goods and energy sectors remain subdued. This divergence demands a recalibration of sector rotation strategies, as investors navigate the interplay between policy uncertainty, trade policy shocks, and consumer behavior.

The Services Sector: A New Inflationary Engine

Services inflation surged to 3.6% annually in July, driven by wage growth, labor market tightness, and the ripple effects of President Trump's tariffs. Housing, healthcare, and professional services saw the most pronounced price pressures, with monthly increases of 0.3%. This trend reflects a structural shift in the economy, where services now account for over 80% of U.S. GDP and are increasingly insulated from traditional disinflationary forces like automation or global supply chains.

For investors, this signals an opportunity to overweight sectors that benefit from sustained demand and pricing power. reveals a clear outperformance in services. However, caution is warranted: sectors like healthcare and education face regulatory headwinds, while leisure and hospitality remain vulnerable to interest rate volatility.

Goods and Energy: The Resilient Underdogs

While services inflation dominates headlines, the goods sector offers a counterpoint. Goods prices rose just 0.5% annually, with energy prices falling 2.7% year-over-year. This divergence is partly a function of global energy markets and trade policy. Energy producers, for instance, have seen a rebound in oil prices due to OPEC+ production cuts, but their valuations remain pressured by long-term decarbonization trends.

Investors seeking diversification may find value in energy and industrial sectors, where earnings resilience contrasts with inflationary pessimism. highlights a narrowing gap, suggesting potential for a re-rating as oil prices stabilize. Similarly, industrial firms with strong balance sheets could benefit from infrastructure spending and supply chain reshoring.

Policy Implications and Rotation Timings

The Federal Reserve's September meeting looms as a pivotal moment. With core PCE above 2% and services inflation entrenched, the central bank faces a delicate balancing act: addressing inflation without stifling a labor market that remains robust. Traders now price in an 87% probability of a rate cut, but the path forward hinges on September's employment data.

A rate cut would likely favor sectors sensitive to borrowing costs, such as real estate and consumer discretionary. Conversely, a hawkish pivot could exacerbate underperformance in high-yield services stocks. Investors should adopt a dynamic rotation strategy, using leading indicators like the ISM Services Index and labor market data to time shifts between sectors.

Strategic Recommendations

1. Overweight Services with Selectivity: Focus on subsectors with durable demand (e.g., healthcare, education) and strong pricing power. Avoid cyclical leisure and hospitality unless rate cuts materialize.
2. Underweight Goods with Caution: Energy and manufacturing sectors offer value but require careful screening for balance sheet strength and exposure to trade policy risks.
3. Hedge Against Policy Uncertainty: Allocate to Treasury Inflation-Protected Securities (TIPS) or short-duration bonds to mitigate interest rate volatility.
4. Monitor Tariff Impacts: Sectors exposed to imported goods (e.g., automotive, retail) face margin compression. Favor domestic producers with pricing flexibility.

Conclusion

The August Core PCE data underscores a new inflationary paradigm: one where services-driven pressures dominate, and traditional disinflationary forces wane. For investors, this necessitates a nuanced approach to sector rotation, balancing exposure to high-growth services with defensive plays in goods and energy. As the Fed navigates this complex landscape, agility and data-driven decision-making will be paramount. The coming months will test the resilience of portfolios, but those attuned to sectoral shifts stand to outperform in an environment of divergent trends.