U.S. Core PCE Inflation Rises to 3.1% in January
A key measure of underlying inflation in the United States, closely monitored by the Federal Reserve, increased 3.1% year-on-year in January. The reading matched economists’ expectations and was slightly higher than the 3.0% annual rate recorded in December.
The core Personal Consumption Expenditures (PCE) price index, which excludes volatile items such as food and energy, rose 0.4% month-over-month in January. The increase was in line with both analysts’ forecasts and the pace seen in the previous month.
Headline PCE Inflation Slightly Below Forecast
According to the U.S. Commerce Department, the headline PCE inflation rate reached 2.8% year-over-year, slightly below expectations of 2.9%. On a monthly basis, the index increased 0.3%, matching forecasts and cooling compared with December’s reading.
The Federal Reserve has set a 2% inflation target, and policymakers are scheduled to announce their next interest-rate decision after a two-day meeting next week. Markets currently expect the Fed to keep interest rates unchanged within the 3.5% to 3.75% range.
Why PCE Inflation Is Running Hotter Than CPI
Recently, the PCE inflation measure has shown stronger price growth than the Consumer Price Index (CPI) released by the Labor Department.
The difference largely stems from how the two indicators calculate consumer spending. The PCE index places less weight on housing costs, which have been cooling, and greater emphasis on healthcare expenses, which have been rising. Additionally, the PCE measure accounts for changes in consumer behavior, such as substitution between goods when prices change.
By comparison, the February CPI report showed annual inflation at 2.4%, suggesting somewhat milder price pressures than the PCE data.
Oil Prices and Geopolitics Could Lift Inflation
Importantly, the latest inflation data largely reflects economic conditions before the outbreak of the Iran conflict, which began with U.S. and Israeli air strikes in late February.
Since then, the war has pushed global oil prices sharply higher, raising concerns that inflation pressures could intensify in the coming months.
These developments have also increased uncertainty around the outlook for the U.S. economy. Additional factors influencing the economic environment include new tariffs and growing corporate investment in artificial intelligence technologies.
Consumer Spending Remains Resilient
Despite these concerns, consumer activity remained relatively strong. Personal spending increased 0.4% in January, exceeding expectations and supporting overall economic growth. At the same time, personal income growth slowed slightly, suggesting households may be facing some pressure from rising costs.
Economists note that the impact of higher oil prices on the U.S. economy may be limited because the country is now a net exporter of crude oil.
According to Paul Ashworth, Chief North America Economist at Capital Economics, the oil price shock may initially weigh on household purchasing power. However, any increase in energy-sector investment could later provide support for economic activity.
Ashworth also expects the U.S. economy to rebound in the first quarter of 2026 after weaker growth in the final months of 2025. The earlier slowdown was partly attributed to a government shutdown that temporarily reduced economic activity.
