US inflation rose less than economists expected in August, offering some relief to markets after renewed concerns over price pressures and rising bond yields.

The Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred measure of inflation, increased 0.3% from the previous month, according to data released by the Commerce Department. On an annual basis, headline PCE inflation stood at 3.4%, below the 3.7% increase economists had anticipated.

Underlying inflation also came in softer than forecast. Core PCE, which excludes the more volatile food and energy categories, rose 0.2% month-on-month and 3.0% from a year earlier. Economists had expected increases of 0.3% and 3.3%, respectively.

Although the Federal Reserve formally targets headline PCE inflation, policymakers often pay close attention to the core measure when assessing the underlying direction of price pressures.

The latest figures were accompanied by changes to the way the Bureau of Economic Analysis calculates several components of the index. The agency revised its methodology for categories including legal services, software and computer accessories, and portfolio management. These adjustments also resulted in a sizeable downward revision to July’s core PCE reading.

Financial markets responded positively to the softer inflation figures. US stock futures moved higher following the release, while Treasury yields declined. Expectations for another Federal Reserve interest rate increase in October also eased, with markets increasingly looking towards December as the more likely timing for any additional tightening.

Despite the better-than-expected headline figures, inflation remains well above the Federal Reserve’s 2% target. Price pressures were particularly evident in energy-related categories during August. Gasoline prices increased 4.4% over the month, while energy goods and services rose 2.3%. Transportation services also recorded a notable 1.4% increase.

Prices for both goods and services increased 0.3%, suggesting inflationary pressure was not confined entirely to energy.

The report also pointed to continued strength in consumer demand. Personal spending jumped 0.9% in August, slightly above the 0.8% increase expected by economists. Personal income, however, rose just 0.2%, falling short of the 0.4% consensus forecast.

The combination of resilient spending and inflation above target leaves the Federal Reserve facing a complicated policy outlook. The central bank raised interest rates by 25 basis points in September, and another increase before the end of the year remains possible.

Expectations for an immediate follow-up move have weakened, however. New York Fed President John Williams indicated this week that policymakers do not need to rush into another adjustment following September’s rate increase. He said the Fed has time to assess incoming economic information, while noting that another increase could still be appropriate later in the year.

Separate economic data released Wednesday also showed that the US economy performed considerably better in the second quarter than previously estimated. Gross domestic product was revised higher to an annualised growth rate of 2.2%, compared with the earlier estimate of 1.5%.

Underlying domestic demand was also stronger. Real final sales to private domestic purchasers, a measure closely watched by Fed officials, increased 4.6%, reflecting stronger consumer spending and investment.

At the same time, inflation estimates for the second quarter were revised slightly lower. Headline PCE inflation for the April-to-June period was adjusted to 5%, while core PCE was revised to 3.3%, with both readings lowered by 0.3 percentage point from previous estimates.

The latest data therefore presents a mixed picture for monetary policy. August inflation was softer than markets expected, but consumer demand remains strong and price growth continues to run above the Fed’s target. Energy costs could also complicate the outlook further, particularly if recent increases in fuel prices feed into September inflation.

For now, the softer PCE report has reduced pressure on the Federal Reserve to raise rates again at its October meeting. Attention will increasingly turn to upcoming employment and inflation data to determine whether policymakers opt for another increase later this year.

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