Fed’s Favorite Inflation Gauge Stubbornly Holds at 2.5%, Tariff Impact Still to Come

The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures Price Index, held steady at 2.5% year-over-year in February, matching January’s rate. Core PCE inflation, which excludes volatile food and energy costs, came in at 2.8% annually and 0.4% monthly, slightly exceeding economists’ expectations of 2.7% and 0.3% respectively. Consumer spending showed resilience, increasing 0.4% in February after January’s 0.3% decline, while inflation-adjusted disposable income rose 0.5% monthly and 1.8% annually.

Fed officials remain cautious about inflation’s outlook, not expecting a return to their 2% target until 2027. Boston Fed President Susan Collins acknowledged upcoming tariffs will likely increase inflation in the short term, potentially delaying progress toward the target. Richmond Fed President Tom Barkin described the economic environment as a “zero visibility” fog requiring extreme caution, advocating for a slow, careful approach to interest rate adjustments given the high level of uncertainty.