Late‑2025 and early‑2026 PCE/CPI/GDP inflation data and how they affect expectations for Fed rate cuts

Inflation Data And Fed Cut Odds

As the U.S. economy moves through late 2025 and into early 2026, inflation and growth data continue to paint a nuanced and sometimes contradictory picture, complicating expectations for Federal Reserve (Fed) monetary policy, particularly regarding the timing and scale of interest rate cuts. While headline inflation measures show some moderation, core inflation and upstream price pressures remain stubbornly elevated, challenging the Fed’s confidence in declaring a sustained disinflation trend. This complex backdrop has generated volatility across fixed income, equity, and currency markets, underscoring the delicate balance policymakers must strike amid evolving economic signals.

Inflation and Growth Trends: Mixed Signals Persist

PCE Inflation: The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, remains persistently sticky. December 2025 and early 2026 data showed year-over-year PCE inflation steady near 2.9% to 3.0%, exceeding many market expectations for further easing. This persistence in core inflation complicates the Fed’s narrative of clear progress toward the 2% target.
CPI Inflation: Contrasting with PCE, headline Consumer Price Index (CPI) inflation provided some relief, cooling to around 2.4% year-over-year in January 2026. However, this softer headline was tempered by ongoing concerns about the resilience of core components, particularly services inflation, and underlying cost pressures.
Producer Price Index (PPI): January 2026 PPI data surprised to the upside, registering a notably stronger increase than forecast. This hotter-than-expected wholesale inflation underscores persistent upstream price pressures that could eventually filter through to consumer prices. The persistence of elevated input costs signals that inflationary forces remain entrenched in supply chains and producer margins.
GDP Price Deflator and Real GDP Growth: The GDP price index surged to an elevated 3.7% in early 2026, reinforcing concerns about broad inflation embedded within overall economic output. Meanwhile, real GDP growth slowed more markedly than anticipated in Q4 2025, with annualized growth at roughly 2.8% quarter-on-quarter, suggesting a softening economy grappling with ongoing price pressures.
Additional Inflation Insights: New York Fed metrics and other inflation gauges continue to show rising core services inflation, pointing to price rigidity in sectors less responsive to economic cycles. Market-based measures of inflation expectations, including the U.S. 5-year forward inflation rate, have inched higher, signaling that investors and participants see inflation persistence as a genuine risk.

Market and Fed Reactions: A Cautious and Divided Outlook

The interplay of sticky inflation and slowing growth has resulted in a complex and evolving policy outlook:

Federal Reserve Stance: The Federal Open Market Committee (FOMC) has maintained a neutral stance through early 2026, reflecting internal divisions amid mixed data signals. Some Fed officials emphasize the need to keep rates “higher for now” to tame inflation, while others lean toward gradual easing once clearer disinflation trends emerge.
Market Pricing and Futures: Despite the Fed’s caution, futures markets continue to price in multiple rate cuts by late 2026 and into 2027, driven by optimism about AI-driven productivity gains and eventual easing of inflation. However, the stronger-than-expected PPI print and persistent PCE inflation have moderated the odds of a mid-2026 cut. Key market developments include:
- The probability of a Fed rate cut by mid-2026 has declined, reflecting tempered optimism.
- Treasury yields have been volatile but generally softened modestly, with the 10-year Treasury yield hovering near 4.04%, indicating investor caution amid uncertainty.
- Some traders persist in betting on a June 2026 rate cut, despite resilient inflation data, highlighting tension between market positioning and economic fundamentals.
Risk Assets and Equities: U.S. equity futures reacted with sharp declines following the release of the slowing GDP growth data and stubborn inflation prints, signaling investor concern that persistent price pressures could delay Fed easing and weigh on growth prospects.
U.S. Dollar and Currency Markets: Contrary to expectations of dollar weakness amid anticipated Fed easing, the U.S. dollar has shown surprising strength. This resilience stems from uncertainty about the timing of rate cuts and safe-haven demand amid market volatility, adding complexity to global trade dynamics and multinational corporate earnings outlooks.

New Insights from Inflation Advisors: Upstream Inflation Remains a Key Concern

A recent advisor-focused analysis emphasized the significance of the unexpectedly strong January PPI data, highlighting how persistent upstream inflation pressures continue to challenge the disinflation narrative. The report underscored that:

Elevated wholesale prices are likely to exert continued cost pressures on consumer goods and services.
Advisors and market participants should prepare for a more prolonged inflation environment than previously anticipated.
The enduring stubbornness of core services inflation, particularly in sectors less exposed to direct competition or economic cycles, signals price stickiness that could sustain inflation above target levels for longer.

This perspective reinforces the Fed’s cautious approach and suggests that market participants may need to recalibrate expectations for the timing and magnitude of rate cuts.

Analytical Commentary and Fed Perspectives

Chicago Fed President Austan Goolsbee has pointed to tariffs and trade policy as contributing factors to sustained inflation pressures, advocating for tariff recalibration to help ease price burdens—a stance that highlights the multifaceted drivers of inflation beyond domestic demand.
The Fed’s overall cautiousness reflects the challenge of navigating inflation risks amid emerging credit stresses and a labor market that, while softening, remains resilient.
Markets and policymakers alike are focusing intently on upcoming inflation data releases—especially PCE, CPI, and PPI reports—as well as Fed commentary, to better gauge the trajectory of inflation and the appropriate policy response.

Summary and Forward Look

The late-2025 and early-2026 data landscape reveals a complex economic environment marked by:

Sticky PCE inflation near 2.9%, defying quick disinflation hopes.
CPI headline easing to 2.4%, offset by persistent core and upstream inflation pressures.
Surging GDP deflator at 3.7%, showing embedded inflation across economic output.
Stronger-than-expected PPI data signaling ongoing cost pressures at the wholesale level.
Mixed signals from slowing GDP growth and resilience in core services inflation.

These factors have led to a more cautious market pricing of Fed rate cuts, with futures still reflecting some easing later in 2026 and 2027 but with tempered confidence in near-term cuts. Treasury and equity markets remain volatile, while the U.S. dollar’s unexpected strength adds further uncertainty.

Looking ahead, the Fed’s policy decisions will remain highly data-dependent, with upcoming inflation and growth releases crucial to recalibrating expectations. The persistence of inflation, particularly in core and upstream measures, suggests that the Fed may maintain a patient but vigilant stance, balancing inflation risks against the potential for economic slowdown.

Market participants and advisors should continue to monitor the evolving inflation signals closely, as these will shape the trajectory of U.S. monetary policy and broader financial conditions throughout 2026.

Sources (23)