The Federal Reserve's preferred inflation gauge showed price increases cooled considerably last month, according to new Commerce Department data released Friday that also showed a slowdown in consumer spending.

The core Personal Consumption Expenditures index, a closely watched inflation measure that excludes gas and food prices, rose 3.9% for the 12 months ended in August. It's the lowest annual increase that index has seen in two years and is a positive step toward the Fed's target of 2% inflation.

On a monthly basis, core PCE grew 0.1%.

The overall PCE index, which includes the more volatile food and energy categories, increased 0.4% from July and 3.5% annually. That's an acceleration from the respective 0.2% and 3.3% rates seen in July; however, it also was largely expected: Gas prices heated up during the month.

Economists estimated that the headline PCE index would rise 0.5% monthly and 3.5% annually, according to Refinitiv.

The Commerce Department's latest Personal Income and Outlays report also showed that consumers pulled back their spending in August and incomes ramped up by 0.4%.

This story is developing and will be updated.