Structural Service-Sector Pressures Keep U.S. Inflation Above Fed Target

The U.S. core Personal Consumption Expenditures (PCE) Price Index, a key inflation metric monitored by the Federal Reserve, rose 2.9% year-over-year in August 2025, matching expectations and the prior month’s reading. This marks the index’s 19th consecutive month above the Federal Open Market Committee’s (FOMC) 2.0% target, underscoring persistent inflationary pressures despite recent policy adjustmentsWhat is keeping core inflation above 2 percent?^[1]. The data, released by the Bureau of Economic Analysis, reflects a stabilization in core inflation after a post-pandemic surge, with analysts attributing the resilience to sectoral dynamics and structural shifts in consumer demand.

Core PCE, which excludes volatile food and energy components, has maintained a steady trajectory since mid-2024, with non-housing core services inflation emerging as the largest contributor. Over the past 12 months, non-housing core services prices increased 3.3%, accounting for 1.9 percentage points of the total core PCE inflation. This category, which includes healthcare, education, and financial services, carries a 55% weight in the core PCE basket. In contrast, core goods inflation rose 1.2%, contributing 0.3 percentage points, while housing inflation (rent and owner-equivalent rent) added 0.7 percentage points with a 3.8% annual increaseWhat is keeping core inflation above 2 percent?^[1].

The Dallas Federal Reserve’s analysis highlights that non-housing core services inflation exceeds levels consistent with a 2.0% core PCE target by approximately 0.3–0.4 percentage points, based on historical relative price trends. This excess is attributed to structural factors such as labor market tightness, service-sector bottlenecks, and persistent demand for labor-intensive goodsWhat is keeping core inflation above 2 percent?^[1]. Analysts note that while tariffs-driven price increases in core goods are expected to moderate over time, the trajectory of non-housing core services remains uncertain. For instance, portfolio management and investment advice services—a volatile subset of non-housing core services—contributed 0.2 percentage points to core PCE inflation in August, driven by market-based fee structures tied to asset valuationsWhat is keeping core inflation above 2 percent?^[1].

The FOMC’s September 2025 Summary of Economic Projections (SEP) aligns with the BEA data, projecting core PCE inflation to decline gradually. The median participant forecasts 3.1% inflation in 2025, with a return to the 2.0% target by 2028. This trajectory assumes a normalization of housing inflation and a moderation in non-housing core services pressures, though the projections acknowledge significant uncertainty. The FOMC’s central tendency for core PCE inflation in 2028 ranges from 2.0% to 2.2%, reflecting divergent views on the pace of disinflationFOMC Summary of Economic Projections, September 2025^[2]. Participants also emphasized that risks to the inflation outlook remain skewed to the upside, particularly in service sectors where pricing power persistsSeptember 17, 2025: FOMC Projections materials, accessible version^[3].

Market participants and analysts have closely tracked the implications of the August data for Federal Reserve policy. The FOMC’s September meeting minutes indicated a cautious approach, with the median federal funds rate projected to remain at 3.6% in 2025, easing to 3.1% by 2028. While the central bank has signaled openness to further rate cuts, the core PCE’s stickiness complicates the timeline for policy normalization. The Dallas Fed’s analysis suggests that without a meaningful slowdown in non-housing core services inflation, the path to the 2.0% target may require prolonged accommodative measuresWhat is keeping core inflation above 2 percent?^[1].

The persistence of inflation above the FOMC’s target has sparked renewed scrutiny of sector-specific dynamics. For example, the 12% annual increase in portfolio management and investment advice services fees in August highlights the role of financial services in sustaining inflation. Such services, which are imputed rather than directly priced, are subject to volatility linked to asset market performance. Analysts caution that while recent stock price stagnation could reduce their contribution to inflation, historical averages suggest this category’s impact is unlikely to disappear entirelyWhat is keeping core inflation above 2 percent?^[1]. Similarly, the stabilization of housing inflation—driven by market rent data—has been cited as a positive development, though the Federal Reserve Bank of St. Louis notes that owner-equivalent rent remains elevated due to constrained housing supply.

The broader economic context includes a projected 1.6% real GDP growth for 2025 and a 4.5% unemployment rate, according to FOMC participants. These figures, combined with inflation expectations, underscore the Fed’s balancing act between curbing price pressures and maintaining economic momentum. The Dallas Fed’s analysis emphasizes that while core goods and housing inflation are expected to recede, the lack of downward momentum in non-housing core services inflation poses a key risk to achieving the 2.0% targetWhat is keeping core inflation above 2 percent?^[1]. This aligns with the FOMC’s acknowledgment of “considerable uncertainty” in its projections, as reflected in wide confidence intervals for GDP growth and inflation outcomesSeptember 17, 2025: FOMC Projections materials, accessible version^[3].