Key Takeaways
- Year-over-year core PCE inflation registered 3.1% in January, surpassing the Federal Reserve’s 2% objective
- Core PCE increased 0.4% on a month-to-month basis, matching forecasts
- Overall PCE inflation stood at 2.8% annually, marginally under the anticipated 2.9%
- Financial markets broadly anticipate the Fed will maintain interest rates between 3.5%–3.75% at the upcoming policy meeting
- January’s figures don’t reflect the Iran conflict’s impact, which has elevated crude prices and created uncertainty for future inflation
On March 13, 2026, the Bureau of Economic Analysis published personal consumption expenditures (PCE) figures for January. This index serves as the Federal Reserve’s primary metric for monitoring inflationary trends.
The core PCE measure, excluding volatile food and energy components, increased 3.1% compared to the same month last year. This aligned with analyst projections while accelerating from December’s 3.0% reading. Month-over-month, core PCE advanced 0.4%, also matching expectations.
The broader headline PCE metric — encompassing all consumer goods and services — expanded 2.8% on an annual basis. This figure came in marginally below the consensus estimate of 2.9% and represented a deceleration from December’s rate.
On a monthly comparison, headline PCE climbed 0.3%, consistent with forecasts.
The Federal Reserve maintains an inflation target of 2%. With core PCE at 3.1%, price levels continue running significantly above the central bank’s desired threshold.
Markets are pricing in a hold pattern from the Fed, with rates expected to remain between 3.5% and 3.75% when the policy committee convenes next week. Given the stubborn inflation readings, rate reductions appear unlikely in the near term.
The PCE gauge has consistently registered higher than the Consumer Price Index published by the Labor Department. This divergence stems primarily from methodological differences in how housing and healthcare expenditures are weighted. PCE assigns lower importance to shelter expenses, which have been moderating, while giving greater weight to medical costs, which continue climbing.
For comparison, February’s CPI registered 2.4% year-over-year — a notably cooler reading.
Missing from the Picture
January’s data reflects economic activity from over a month in the past. Critically, it doesn’t capture effects from the Iran conflict, which commenced following U.S. and Israeli military operations in late February.
Oil prices have surged substantially since hostilities began. Elevated energy prices typically translate into broader inflationary pressure in subsequent months.
The economic landscape faces additional complexity from comprehensive tariff policies and substantial corporate investment in artificial intelligence infrastructure. While both factors are already influencing economic conditions, their full effects remain difficult to measure in real-time.
Paul Ashworth, serving as Chief North America Economist at Capital Economics, observed that America’s status as a net oil exporter might moderate the impact of rising crude prices. He acknowledged that while elevated energy costs could initially constrain household purchasing power, any positive effects on investment activity would materialize gradually.
Personal spending expanded 0.4% in January versus the previous month, exceeding projections. Meanwhile, personal income growth experienced a modest slowdown.
Looking Forward
Fourth-quarter GDP growth for 2025 underwent a significant downward revision to merely 0.7%.
Ashworth anticipates an economic recovery during the first quarter of 2026, driven in part by the dissipation of headwinds from a government shutdown that occurred in late 2025.
The Federal Reserve’s upcoming interest rate announcement will follow a two-day policy meeting concluding next week. Current market indicators suggest rates will be held steady.
