PCE, CPI and PPI readings, with a focus on the Fed’s preferred gauges and signs of persistent or cooling inflation

US Inflation Data and Price Pressures

As the U.S. economy moves deeper into 2026, the latest inflation data reveal a complex and stubborn inflation landscape that continues to challenge the Federal Reserve’s efforts to bring price growth back to its 2% target. Recent releases of the Personal Consumption Expenditures (PCE) index, Consumer Price Index (CPI), and Producer Price Index (PPI) underscore persistent inflationary pressures, especially within the services sector and upstream supply chains. These developments have reinforced market expectations of a prolonged Fed policy pause, with no immediate rate cuts anticipated.

Recent Inflation Data: Core PCE, CPI, and PPI Show Persistent Inflation

Core PCE Inflation Surprises on the Upside
The Federal Reserve’s favored inflation measure, the core PCE price index excluding food and energy, recorded a 0.3% month-over-month increase in December, exceeding consensus forecasts of 0.27%. This nudged the annualized core PCE inflation rate to approximately 2.9%, up from 2.8% in the prior month. The upward surprise was largely fueled by ongoing price pressures in sticky service categories—healthcare, education, and recreation—which have proven resistant to short-term economic shifts.

Analysts highlight the continued upward momentum in the December reading as a sign that inflation has not yet begun a sustained descent, complicating the Fed’s inflation-fighting task.
This persistent service inflation aligns with previous observations that price stickiness in these sectors is a major driver of current inflation dynamics.

CPI Data Mirror Service Inflation Stickiness
January’s Consumer Price Index showed a 0.2% month-over-month increase, with the “services less rent of shelter” segment again exerting upward pressure. Although CPI and PCE differ in methodologies and weights, the CPI data corroborate the finding that service prices remain elevated and are a critical component of ongoing inflation.

Producer Price Index Indicates Upstream Cost Pressures Are Firming
The January PPI report surprised to the upside with a 0.5% monthly increase and a 2.9% year-over-year gain, both slightly above forecasts and prior readings. The broad-based nature of the PPI increase, especially strong growth in services-related inputs, signals that cost pressures at earlier stages of production remain stubborn.

Elevated PPI readings suggest that upstream inflationary pressures have not eased, potentially feeding through to consumer prices in future months.
Market commentary has emphasized that this persistence points to inflation’s entrenched nature rather than a transient spike.

New Tariffs Compound Inflationary Risks
Adding to the inflation complexity are newly implemented tariffs on select imports, which analysts expect to increase producer costs and ultimately consumer prices. These tariffs, combined with resilient service inflation and robust demand in certain sectors, intensify cost-push pressures.

Drivers and Risks: Service Inflation, Wage Dynamics, and Structural Factors

The data highlight several key inflation drivers and risks that underpin the current persistence:

Sticky Service-Sector Inflation: Services such as healthcare and education have prices less sensitive to economic cycles and wage pressures have kept upward momentum strong.
Wage Growth and Structural Constraints: Continued tightness in labor markets contributes to wage inflation, which feeds into service costs. Supply constraints and limited productivity gains exacerbate these pressures.
Policy and External Factors: New tariffs and global supply chain disruptions maintain cost pressures on producers, complicating the inflation outlook.

Fed officials have openly acknowledged these challenges. Kansas City Fed President Jeffrey Schmid recently remarked that “high inflation remains the biggest challenge” for monetary policy. Chicago Fed President Austan Goolsbee reiterated the Fed’s cautious, data-driven approach, emphasizing that “clear and convincing evidence” of sustained inflation easing is required before any policy relaxation.

Federal Reserve Policy and Market Response: Prolonged Pause Anticipated

Fed’s Data-Dependent Stance and Cautious Outlook
Given the unexpected strength in inflation readings, the Federal Reserve is signaling a cautious, patient approach. Immediate rate cuts or policy easing are unlikely until more decisive evidence of inflation retreat emerges.

Analysts note the Fed is balancing a delicate trade-off: curbing inflation without tipping the economy into recession.
Discussions continue over Fed communication strategies, including whether to maintain the Federal Open Market Committee’s “dot plot” projections, which shape market expectations.

Market Pricing Reflects Expectation of Extended Restrictive Policy
Financial markets have adjusted to the inflation data and Fed signals with nuanced positioning:

Fed Funds Futures and Prediction Markets: According to the latest Economy Prediction Markets brief (February 27, 2026), there is a 97% probability that the Fed will hold rates steady at its March meeting, indicating strong market conviction in a prolonged pause.
Treasury Yields: The 2-year Treasury yield has declined below 4%, reflecting diminished odds of imminent rate hikes yet pricing in a sustained period of restrictive monetary policy. Meanwhile, the 10-year Treasury yield remains range-bound, leading to a modest steepening of the yield curve.
Rising Term Premia: Long-term bond investors demand higher term premia, signaling concerns about persistent inflation and fiscal sustainability risks.

Near-Term Monitorables and Outlook

The inflation and policy outlook will hinge on several critical upcoming developments:

Upcoming Monthly Inflation Releases: Continued monitoring of monthly PCE, CPI, and PPI reports will be essential to detect any meaningful shifts in inflation trends.
Federal Reserve Communications: Market participants will closely watch Fed statements, the future of the dot plot, and any shifts in forward guidance for clues on policy trajectory.
Tariff and Fiscal Policy Developments: Changes in trade policy or fiscal measures could alter cost pressures and inflation dynamics.

Summary

Core PCE inflation accelerated modestly in December, with sticky service-sector prices driving the increase.
CPI data for January confirm ongoing service inflation, particularly outside of shelter.
Producer prices rose more than expected, signaling persistent upstream cost pressures.
Newly imposed tariffs are adding further inflationary risks.
Fed officials maintain a patient, data-dependent policy stance, with no immediate easing expected.
Financial markets price in a prolonged pause, with high odds against a March rate cut and cautious adjustments in yields and term premia.

The inflation readings reinforce the challenging environment policymakers face: taming entrenched inflation, notably in services and producer costs, without stifling economic growth. Close attention to upcoming data and Fed communications will be crucial in navigating the uncertain path ahead.

Sources (17)