An inflation measure closely watched by the Federal Reserve ticked higher in August as steep prices continue to squeeze millions of US households. 

The personal consumption expenditures index showed that consumer prices rose 0.4% from the previous month, according to the Labor Department. On an annual basis, prices climbed 3.5% – up from 3.3% recorded the previous month, underscoring the challenge of taming high inflation. 

The figures were both in line with estimates from Refintiv economists.

In a sign the Fed’s fight against inflation is making progress, core prices – which strip out the more volatile measurements of food and energy – climbed 0.1% from the previous month and 3.9% from the previous year. It marked the best reading for core inflation since 2021.

While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation. Still, both the core and headline numbers point to inflation that continues to run above the Fed’s preferred 2% target.

“The untangling of the sticky inflation embedded deep in the core remains, at 3.9% – but thankfully finally below 4% – still decidedly above the Fed’s 2% target for delivering ‘price stability,'” said Quincy Krosby, chief global strategist for LPL Financial.

Other figures included in the report showed that consumer spending rose just 0.4% in August, compared to a 0.9% increase in July. Many economists anticipate that spending will slow in the coming months as consumers continue to grapple with expensive goods, high interest rates and the resumption of federal student loan payments.

“We expect the consumer engine will lose some steam as the labor market and excess savings tailwinds fizzle out,” said Lydia Boussour, EY senior economist. “Consumers are spending more conservatively as they continue to face headwinds from elevated inflation, higher interest rates, and slowing labor market and income gains.”

Stocks climbed Friday morning as the report fueled investor hopes for a rate pause.

The Fed skipped a rate hike during its two-day meeting last week, but signaled that another rate hike is on the table this year. 

“We’re prepared to raise rates further, if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective,” Powell told reporters at a post-meeting press conference in Washington.