A fresh reading on inflation Friday keeps the Federal Reserve on track to continue cutting interest rates this fall, likely in 25 basis point increments.

The Fed’s preferred inflation gauge — the core Personal Consumption Expenditures (PCE) index that excludes volatile food and energy prices — clocked in at 2.7% over the prior year during the month of August.

That was in line with expectations and up a tenth of a percent from 2.6% in July. It remains above the Fed's 2% target.

The result means that a bigger 50 basis point cut may be hard to justify at the Fed's next meeting in November, according to some Fed watchers.

The fact that core inflation year-over-year is holding the level of the last two months, and not dropping, lines up more with a scenario for a smaller cut — lest the job market substantially weaken between now and November.

"The core year-over-year at 2.7% suggests that another round of 50 basis points needs to come under careful scrutiny unless the labor market suggests weakness," said Quincy Krosby, chief global strategist for LPL Financial.

Measured on a month over month basis, PCE looked even better. That measure rose just 0.1% compared with expectations for 0.2% and was down from 0.2% in July and June.

When food and gas prices are added back in, PCE rose 2.2% in August — just two-tenths away from the Fed’s 2% inflation target. That was lower than estimates of 2.3% and down from 2.5% in July.

"Fed officials are feeling pretty good about where inflation is sitting," said Pimco managing director Tiffany Wilding, who is predicting two more 25 basis point cuts in November and December.

Investors, however, are still split on whether the Fed will cut from 25 basis points or 50 basis points at the next policy meeting in November. The odds of a bigger cut rose slightly to 54% following the release of the PCE data.

The consensus among Fed officials outlined last week is for two more 25 basis point rate cuts in 2024.

They made this prediction while approving a new 50 basis point cut, the first such reduction since 2020, citing confidence that inflation is on its way down and evidence that the job market is cooling.

Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards

Economists from accounting firm EY said in a note Friday that "we continue to expect the Fed to ease policy by 25bps at every meeting through June next year."

That outlook could shift, added EY senior economist Lydia Boussour and EY chief economist Gregory Daco, if "labor market conditions were to deteriorate further."