Key Takeaways
- January’s core PCE inflation registered 3.1% on an annual basis, exceeding the Federal Reserve’s 2% objective
- Core PCE increased 0.4% on a month-over-month basis, matching analyst predictions
- Overall PCE inflation reached 2.8% annually, marginally lower than the 2.9% forecast
- Financial markets broadly anticipate the Federal Reserve will maintain interest rates between 3.5%–3.75% during the upcoming policy meeting
- These figures predate the Iran military conflict, which has driven crude oil prices upward and created uncertainty around future inflation trends
On March 13, 2026, the Bureau of Economic Analysis published its personal consumption expenditures (PCE) report for January. The Federal Reserve relies on this PCE metric as its primary gauge for measuring inflationary pressures.
The core PCE measurement, which excludes volatile food and energy components, increased 3.1% compared to the same period last year. This aligned with Wall Street projections but represented an acceleration from December’s 3.0% figure. Monthly, the core measure advanced 0.4%, consistent with economist estimates.
The broader headline PCE indicator — encompassing all consumer goods and services — expanded 2.8% on an annual basis. This came in marginally below the anticipated 2.9% reading and represented a deceleration from the previous month’s pace.
On a monthly comparison, the headline figure climbed 0.3%, matching consensus expectations.
The Federal Reserve maintains an inflation objective of 2%. With core PCE currently at 3.1%, price levels remain significantly elevated compared to the central bank’s desired trajectory.
Markets anticipate the Fed will maintain its current policy stance, keeping interest rates between 3.5% and 3.75% when officials convene next week. Given the stubborn inflation readings, rate reductions appear unlikely in the near term.
PCE measurements have consistently registered higher than the alternative Consumer Price Index published by the Labor Department. This divergence stems primarily from different methodologies in weighting housing and healthcare expenditures. The PCE framework assigns lower importance to shelter expenses, which have moderated recently, while placing greater emphasis on medical costs, which continue climbing.
By comparison, February’s CPI registered 2.4% year-over-year — a considerably more subdued reading.
Missing from the Picture
January’s data captures economic conditions from over a month in the past. The figures don’t reflect consequences from the Iran military confrontation, which commenced with coordinated U.S. and Israeli military operations in late February.
Oil prices have surged substantially following the outbreak of hostilities. Elevated crude costs typically translate into higher inflation readings in subsequent months.
The economic landscape grows more complex when factoring in extensive tariff implementations and substantial corporate investment in artificial intelligence infrastructure. Both factors are influencing economic conditions currently, though their full impact remains difficult to measure accurately in real time.
Paul Ashworth, serving as Chief North America Economist at Capital Economics, observed that the United States functions as a net petroleum exporter, potentially limiting the damage from rising crude prices. He emphasized that although increased energy expenses might initially reduce consumer purchasing capacity, any corresponding boost to business investment would require considerable time to materialize throughout the economy.
Consumer spending expanded 0.4% in January versus the previous month, surpassing analyst forecasts. Meanwhile, personal income growth experienced a modest deceleration.
Looking Ahead
Economic growth for the fourth quarter of 2025 underwent a substantial downward revision to merely 0.7%.
Ashworth projects the economy will experience renewed momentum during the first quarter of 2026, partially attributable to diminishing headwinds from a government shutdown that occurred in late 2025.
The Federal Reserve’s upcoming interest rate announcement is scheduled following a two-day policy committee session next week. Current market indicators suggest rates will remain unchanged.
