Key points from the August PCE data. 1. Core PCE price index (excluding food and energy, the Fed's most closely watched inflation gauge): up 3.0% year-over-year (below the market expectation of 3.3%, previous value 3.3%), and up 0.2% month-over-month (below the market expectation of 0.3%, unchanged from the previous 0.2%). 2. Headline PCE price index: up 3.4% year-over-year (below the market expectation of 3.7%, previous value 3.7%).

Immediate market reaction. After the data release, because both core PCE and headline PCE growth came in below prior market expectations, concerns about inflation stickiness were noticeably eased. 1. US equity index futures rose in a straight line: S&P 500 futures briefly climbed 0.37%, Nasdaq 100 futures gained 0.35%, and Dow futures rose 0.31%. 2. Rate expectations were repriced: previously, the market worried that the Fed would continue aggressive rate hikes at its October meeting due to rebounding energy prices and resilient consumption, but the below-expected PCE data sharply reduced the pressure for near-term urgent hikes.

Our judgment logic. We believe the Democrats will most likely control the House in the midterm election results, which will create an effective check on the Trump administration (for example, on fiscal discipline and initiating wars), and market uncertainty about the Trump administration will be calmed. Therefore, the 10-year US Treasury yield is expected to decline, and the market may begin to warm up in November. If next month's CPI continues today's PCE slowdown, Treasury yields may fall earlier.

1. Disinflation regains momentum: compared with the high stickiness of inflation in previous months, core PCE year-over-year fell to 3.0% in August, indicating that the short-term shock from tariffs and higher goods prices is beginning to fade, and housing services price growth also slowed further. 2. It gives the Fed breathing room for monetary policy: for example, Williams' latest remarks argued that there is "no need to act in a hurry," with one more hike this year still the baseline, but October is not a must. The below-expected inflation data provides strong data support for the Fed to stay on hold and pause hikes at its October meeting. 3. The market's focus shifts to consumption and the labor market: although inflation cooled more than expected, personal consumption expenditure and real income dynamics still need close attention. If US household consumption remains resilient, the process of inflation returning to the 2% longer-run target may still see periodic reversals.

However, alongside this August PCE release, the BEA also published its Annual & Comprehensive Revision, mainly involving statistical methodology corrections, rebasing of consumption weights, and recalculation of price deflators for detailed components.

Main adjusted components. According to the technical details released by the BEA for this revision, changes in component weights and methodological fine-tuning were concentrated in the following four core areas. 1. Financial and insurance services. Adjustment: the BEA modified the price deflator calculation model for financial services without explicit fees (such as bank custody services and fee-free transactions). Weight/change: this category has a weight of about 1.7% in core PCE, and the new model corrected the previous bias that overstated price gains in this area, lowering the annualized increase for this detailed item from 14.3% under the old method to 12.3% under the new method. 2. Healthcare services. Adjustment: based on the latest actual billing data from the Centers for Medicare & Medicaid Services (CMS), the actual expenditure weights for hospital services and outpatient medical care were slightly adjusted. Weight/change: because the share of medical costs in GDP and the expenditure method was recalculated, the weight of medical services was slightly raised. But since actual medical service prices changed modestly year-over-year in the past two quarters, increasing this item's weight instead diluted the pull from high-inflation items such as housing. 3. Housing and owners' equivalent rent. Adjustment: although housing accounts for about 34% of CPI, its weight in PCE has long remained between 15% and 18%. Based on annual population mobility and consumption survey data, the BEA rebalanced the actual consumption share of housing services. Weight/change: a slight downward revision to the housing weight further weakened the pull of "sticky housing inflation" on the total PCE index. 4. Computer software and accessories. Due to differences in statistical scope, this category accounts for only about 0.035% of the CPI basket but about 1.2% of the PCE basket (more than 30 times higher). Weight/change: the BEA repackaged broad IT services, financial data processing, and cloud hosting and incorporated them into a new deflation algorithm. Although the total weight of this broad category slightly expanded to about 1.7% under the new accounting system, its internal price growth rate was sharply reduced. The BEA recalculated supply-based bridge table data, compressed the actual weight of physical storage hardware to less than 10%, and used software publishing and cloud infrastructure PPI (more than 90%) as the core of price deflation. Fed research indicates that after this revision, the annualized contribution of this category to core PCE will fall by about 0.16 percentage points (from 0.66 percentage points to 0.50 percentage points).

What would this PCE reading have been if "old weights/old methods" were used? The BEA's methodology update and weight revisions this time lowered core PCE year-over-year by about 0.2% to 0.3% (that is, 20 to 30 basis points).

Summary: the real implications for policy judgment. If the BEA's "technical revision" were not considered, August core PCE year-over-year should actually have been around 3.2% to 3.3%. This means: 1. Nominal beat versus actual moderate cooling: on the surface, inflation fell sharply from 3.3% last month to 3.0% (far above the market expectation of 3.3%), with roughly half of that due to the "technical squeeze" from statistical tools and weights. 2. The Fed's real perspective: when assessing inflation trends, Fed officials usually filter out this kind of one-time base effect caused by statistical methodology changes and focus more on the true inflation momentum after removing technical distortions. Therefore, although the 3.0% reading is a major boost to market sentiment on the screen, the Fed will still maintain a certain degree of caution when setting interest rate policy.