The year-over-year core PCE inflation rate ticked up from 3% in December to 3.06% in January. The outlook is worse in the sense that the annualized month-over-month core PCE inflation rate has been running well over 4%. As discussed in previous posts, the year-over-year rate is roughly the average of the previous 12 month-over-month inflation rates. As a result, the change in the year-over-year rate between December 2025 and January 2026 is determined by the difference in the month-over-month observation being added into this 12 month average, 4.45% for January 2026, and the observation being dropped, 3.84 for January 2025. Our trend measure of inflation is the happy medium of the volatile month-over-month rate and the slow-to-adjust year-over-year rate. Trend core PCE inflation rose from 3.14% in December to 3.58% in January.
Year-over-year overall PCE inflation fell slightly from 2.91% in December to 2.83% in January as the month-over-month rate fell from 4.39% in December to 3.35% in January. Our trend measure moved up from 3.26% to 3.29%.
Policy Outlook
The bottom line is that core PCE inflation is running well above the Fed’s 2% target. Keep in mind that the latest PCE release is for January 2026. Earlier this week, CPI data for February was released. It is not until April 9 that the corresponding PCE data will be available — the delay once again due to the month-long federal government shutdown in the Fall. Consequently, the effects of the runup in oil prices in anticipation of the war with Iran have yet to show up in the PCE price data. While core inflation measures strip out the immediate effect of changes in energy prices, the effects of the war will eventually filter into other prices, partly through increased transportation costs that will be priced in to final goods prices, and eventually into food prices since the Middle East is an important supplier of fertilizer ingredients.
