Structural challenges within the service sector are maintaining U.S. inflation rates above the Federal Reserve’s target.

The core Personal Consumption Expenditures (PCE) Price Index in the United States, a primary inflation gauge tracked by the Federal Reserve, increased by 2.9% year-over-year in August 2025, in line with both forecasts and the previous month’s figure. This marks the 19th straight month that the index has exceeded the Federal Open Market Committee’s (FOMC) 2.0% goal, highlighting ongoing inflationary challenges despite recent policy changes What is keeping core inflation above 2 percent? [ 1 ]. According to data from the Bureau of Economic Analysis, core inflation has steadied following a surge after the pandemic, with experts attributing its persistence to shifts in sectoral trends and changes in consumer behavior.

Excluding the more unpredictable food and energy categories, core PCE has shown a consistent pattern since mid-2024, with non-housing core services making the largest impact. Over the past year, prices for non-housing core services climbed 3.3%, making up 1.9 percentage points of the total core PCE inflation. This segment, which covers healthcare, education, and financial services, represents 55% of the core PCE index. By comparison, core goods inflation rose 1.2%, contributing 0.3 percentage points, while housing inflation (including rent and owner-equivalent rent) added 0.7 percentage points with a 3.8% annual rise What is keeping core inflation above 2 percent? [ 1 ].

Analysis from the Dallas Federal Reserve indicates that inflation in non-housing core services is about 0.3–0.4 percentage points higher than what would be consistent with a 2.0% core PCE target, based on historical price relationships. This excess is linked to structural issues such as a tight labor market, bottlenecks in the service sector, and sustained demand for labor-intensive services What is keeping core inflation above 2 percent? [ 1 ]. Experts point out that while tariff-driven price hikes in core goods may ease over time, the outlook for non-housing core services is less certain. For example, portfolio management and investment advisory services—a volatile part of non-housing core services—added 0.2 percentage points to core PCE inflation in August, influenced by fee structures tied to asset values What is keeping core inflation above 2 percent? [ 1 ].

The FOMC’s September 2025 Summary of Economic Projections (SEP) is consistent with the BEA’s findings, anticipating a gradual decrease in core PCE inflation. The median forecast among participants is for 3.1% inflation in 2025, with a return to the 2.0% target by 2028. This path assumes that housing inflation will normalize and that pressures from non-housing core services will ease, though the projections recognize considerable uncertainty. The FOMC’s central range for core PCE inflation in 2028 is between 2.0% and 2.2%, reflecting differing opinions on how quickly inflation will fall FOMC Summary of Economic Projections, September 2025 [ 2 ]. Participants also highlighted that inflation risks remain tilted upward, especially in service industries where pricing power is strong September 17, 2025: FOMC Projections materials, accessible version [ 3 ].

Investors and analysts have been monitoring the August numbers for their impact on Federal Reserve policy. Minutes from the FOMC’s September meeting revealed a cautious stance, with the median federal funds rate expected to stay at 3.6% in 2025 and decline to 3.1% by 2028. Although the central bank has indicated it may consider further rate reductions, the persistent nature of core PCE inflation complicates the process of returning to normal policy. The Dallas Fed’s research suggests that unless there is a significant slowdown in non-housing core services inflation, reaching the 2.0% target could require extended accommodative policies What is keeping core inflation above 2 percent? [ 1 ].

The continued inflation above the FOMC’s goal has led to renewed focus on sector-specific factors. For instance, the 12% annual jump in portfolio management and investment advisory fees in August underscores the influence of financial services on inflation. These services, which are estimated rather than directly priced, are subject to fluctuations based on asset market performance. Analysts warn that while stagnant stock prices might lessen their inflationary impact, historical data suggests this category will likely continue to play a role What is keeping core inflation above 2 percent? [ 1 ]. Likewise, the leveling off of housing inflation—driven by market rent trends—has been seen as a positive sign, though the Federal Reserve Bank of St. Louis points out that owner-equivalent rent remains high due to limited housing supply.

In the broader economic picture, FOMC participants expect real GDP to grow by 1.6% in 2025 and the unemployment rate to reach 4.5%. These projections, together with inflation expectations, highlight the Fed’s challenge in balancing inflation control with economic growth. The Dallas Fed’s analysis notes that while inflation in core goods and housing is likely to subside, the lack of downward movement in non-housing core services inflation remains a significant obstacle to achieving the 2.0% target What is keeping core inflation above 2 percent? [ 1 ]. This is consistent with the FOMC’s recognition of “considerable uncertainty” in its forecasts, as shown by the wide confidence intervals for both GDP and inflation outcomes September 17, 2025: FOMC Projections materials, accessible version [ 3 ].