Fed’s Preferred Inflation Gauge Picks Up Speed Even Before Tariff Impact
The Core PCE Price Index, the Federal Reserve’s preferred measure of inflation, climbed 0.4% month-over-month in February, according to data released Friday by the Commerce Department’s Bureau of Economic Analysis (BEA). This increase exceeded the +0.3% consensus expectation and marked a step up from January’s 0.3% rise, representing the largest monthly jump since January 2024. The hotter-than-anticipated reading signals a re-acceleration of inflationary pressures early in 2025.
On an annual basis, the Core PCE Price Index, which strips out volatile food and energy prices, rose 2.8% year-over-year in February, outpacing the +2.7% consensus forecast and January’s +2.7% figure (revised upward from an initial +2.6%). This uptick further underscores persistent price pressures in early 2025.
Fed policymakers rely on the Core PCE Price Index as their go-to tool for tracking underlying inflation trends. The latest February data indicates that inflation is not cooling as much as the central bank had hoped, potentially complicating their efforts to guide inflation back toward its 2% target.
The latest data shows no signs of being driven by tariffs, according to the BEA. Instead, the reacceleration was propelled primarily by services costs, which posted the largest increase in a year. This surge in services inflation, rather than goods or tariff-related factors suggests domestic demand and labor-intensive sectors are fueling the persistent price pressures observed.
“Core PCE was higher than expected, and it might be hard to go lower from here because incomes are high and tariffs are coming,” David Russell, global head of market strategy at TradeStation told Bloomberg.
“We might be looking at the last remnants of the old economy before inflation expectations are permanently reset upward. This might be the opposite of Goldilocks, with incomes and inflation too high for the Fed to lower rates very much. Meanwhile, prospects for growth and profit margins are dimming,” he added.
The broader PCE Price Index rose 0.3% month-over-month in February, aligning with the +0.3% consensus and matching January’s increase. On a year-over-year basis, the index climbed 2.5%, consistent with both the +2.5% consensus forecast and January’s 2.5% reading. This stability in the headline PCE suggests that, despite the core index’s hotter performance, overall inflation pressures arguably remained steady.
As inflation ticked up, personal income surged alongside it, rising 0.8% month-over-month—the largest increase since January 2024. This gain significantly outpaced the 0.4% rise in personal spending for the same period, highlighting a notable divergence between income growth and expenditure. The widening gap may reflect households saving more of their income, potentially as a buffer against persistent inflation driven by soaring services costs, as the personal savings rate rose to 4.6% from 4.3% in January, reaching its highest level in at least eight months.
Joseph Brusuelas, chief economist at RSM US, offered a concise assessment of the data: “Inflation improvement has stalled out. The notion of stubborn and sticky inflation is the primary narrative here in advance of the greater trade shock that will show up in the hard data in coming months. The second-round effects are going to be key here going forward.”