The Fed's Favorite Measure Of Inflation Stayed Hot In January

Key Takeaways

• Inflation in January, as measured by the Personal Consumption Expenditures index, was close to forecasters’ expectations.
• Inflation rose 2.8% over the year and the “core” measure excluding food and energy rose 3.1%.
• The report showed that prices were stubbornly above the Fed’s 2% annual target early this year, before the Iran war sent energy prices soaring.

Inflation was hovering in a stubbornly high pattern, but not surging, before the Iran war sent energy prices spiraling.

Consumer prices as measured by Personal Consumption Expenditures rose 2.8% over 12 months in January, down from a 2.9% annual increase in December, the Bureau of Economic Analysis said Friday. That was less than the 2.9% increase forecasters had expected, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.

On the other hand, the core PCE price index, which excludes the volatile prices for food and energy, rose 3.1% over the year, up from a 3% annual increase in December. That was a fresh high since early 2024 and matched forecaster expectations.

What This Means For The Economy

Inflation earlier in the year was not spiraling out of control, but was still high enough to discourage the Federal Reserve from lowering interest rates.

The change in core PCE prices is especially notable because it is the benchmark the Federal Reserve uses to judge whether inflation is at its target of a 2% annual rate—a level not seen since the pandemic caused prices to spike in 2021.

“The Fed’s preferred inflation metric shows the economy is still battling inflation at the start of the new year,” Jeffrey Roach, chief economist at LPL Financial, wrote in a commentary.

The report is less informative than usual about the inflation outlook because it doesn’t reflect the significant price increases caused by the Iran war in early March, and it is an additional month behind because the BEA is still catching up after delays caused by the government shutdown last autumn.

Related Education

Personal Consumption Expenditures (PCE): What It Is and Measurement

What Is Core Inflation?

Economists expect inflation to accelerate in the coming months and only begin to fade once supply disruptions from the Iran war end.

“The inflation trajectory will only steepen in the coming months to around 4.5%, with gasoline prices set to climb to $3.75 on average nationally, a spike in diesel and fertilizer prices, and rising prices in other wide-ranging commodities,” Kathy Bostjancic, chief economist at Nationwide, wrote in a commentary. “Thereafter, once the flow of oil and commodities begin to normalize, inflation could ease back to around 3% by year-end.”

Update, March 13, 2026—This story was updated after publication to include commentary from economists.

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