The Fed's Preferred Inflation Gauge Declined More Than Expected in August, Yet Bond Yields Aren't Budging. Here's One Reason Why.

The Federal Reserve's preferred inflation measure came in cooler than forecast for August, yet Treasury yields held stubbornly near multi-year highs. Core Personal Consumption Expenditures rose 0.2% month-over-month and 3.0% year-over-year, undershooting economist estimates of 0.3% and 3.3%. Despite the softer print, the 10-year Treasury yield remained elevated in the 5.30–5.65% range.

The muted bond market reaction reflects two factors. The Bureau of Economic Analysis recently revised its PCE calculation methodology, mechanically lowering reported inflation by 0.2–0.3 percentage points. Traders are also discounting August data as fuel prices climbed in September, potentially erasing the improvement. Still, fed funds futures shifted: the probability of a rate hold at the October FOMC meeting rose to 60.7%.

CME (CME) Group's fed funds futures contracts serve as the pricing mechanism for these policy expectations, with the platform capturing real-time shifts in rate-hike probabilities as traders digest incoming inflation data.