The Federal Reserve’s preferred inflation gauge declined slightly in January but remained well above the U.S. central bank’s target, as global energy and trade shocks stemming from the first two weeks of the Iran war have renewed fears that even higher inflation is ahead.
Updates to the personal consumption expenditures (PCE) price index published Friday by the Bureau of Economic Analysis show the all-categories index increased 0.3% on a monthly basis in January, slightly slower than the 0.4% monthly gain posted in December, to land 2.8% higher than a year ago, also slightly below December’s 2.9% yearly rate.
However, so-called “core” PCE inflation, which excludes volatile food and energy prices, increased 3.1% over the year, up from 3% in December. Across the all-items index, goods prices were flat over the month after posting 0.4% growth in December, while services prices ticked up 0.4% following 0.3% gains in December and November.
While noting that the January PCE data “feel even more dated in the wake of the ongoing conflict in Iran,” Wells Fargo economists Tim Quinlan and Shannon Grein wrote in an analysis that the Iran war “is likely to dent households’ purchasing power in coming months amid higher gasoline prices, and we’ve marked down our consumer spending forecast in our recent update as a result.”
They added that there was “little surprise on the inflation side,” but “these data feel stale as we brace for some upside to inflation in the coming months.”
Though pass-through impacts from President Donald Trump’s signature tariff policies were less pronounced in 2025 than some economists expected, Fed policymakers have consistently projected that a “one-time price hike” from the higher import taxes will fade “in the middle quarters” of 2026.
As a weak jobs report for February collides with heightened inflation anxiety, Fed officials meet next Tuesday and Wednesday for their second policy meeting of 2026, at which point financial markets fully expect the federal funds rate to remain unchanged from its current range of 3.5% to 3.75%.
The Fed has a dual mandate to maintain maximum employment and stable prices, each side of which has been in tension since early 2025. Fed Chair Jerome Powell said after the last policy meeting in late January that PCE inflation began and ended last year around 3%, above the Fed’s stated target of 2% annual growth and netting no annual progress.
The Bureau of Labor Statistics reported Tuesday that the consumer price index, a separate but widely studied measure of consumer price changes, showed 2.4% annual growth in February after posting 2.5% growth the previous month, in line with economists’ forecasts.
One explanation for U.S. central bankers’ preference for PCE inflation readings is that shelter inflation accounts for roughly 40% of CPI. PCE reflects a more broadly distributed gauge of fluctuating price levels, while CPI can behave with more volatility from swings driven by outsized changes in the shelter index.
Shelter costs rose 0.2% over the month in January, according to the latest PCE figures, amid broad and sustained cooling in shelter inflation over the past two years. Despite that softening in rent growth and home price appreciation, homebuying costs stand to increase at least in the near term, pending the severity and duration of the ongoing war with Iran.
Average rates on 30-year fixed-rate home loans jumped to almost 6.2% last week, according to the Mortgage Bankers Association, on rising inflation fears that have raised benchmark yields on 10-year U.S. Treasury bonds from 3.96% on Feb. 27 — the day before the U.S. and Israel launched unexpected strikes on Iran — to 4.27% as of midday Friday.
