Fed’s Favorite Inflation Measure Holds Firm Ahead of Key CPI Report

The Federal Reserve’s preferred inflation gauge held steady before the war in Iran.

Inflation in the annual personal consumption expenditures (PCE) price index was unchanged in February at 2.8 percent, according to new data from the Bureau of Economic Analysis released on April 9.

Core PCE inflation, which excludes volatile energy and food prices, edged lower to 3 percent.

Both readings were in line with economists’ expectations.

Monetary policymakers prefer PCE as a forecasting tool to the consumer price index (CPI) because it is updated more frequently and maintains broader coverage of goods and services.

Additionally, the central bank views core PCE as a better long-term inflation indicator since monetary policy can do little to influence energy and food prices.

On a monthly basis, PCE and core PCE each rose by 0.4 percent.

“We didn’t see elevated readings in the February inflation data, which means we were in a good starting place, but the war—and the elevated energy prices that came with it—will likely filter into the March PCE readings, which will be released at the end of this month,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in a note emailed to The Epoch Times.

Before the Iranian conflict, inflation appeared sticky and held steady. But the latest figures are the calm before the storm, as the March CPI report will be published on April 10.

The median estimate for the 12-month inflation rate is 3.4 percent, according to forecasts collected by FactSet Insights.

This would be the largest increase in the CPI since April 2024 and would be firmly above the trailing 12-month average of 2.6 percent.

This is even higher than the Cleveland Fed’s Inflation Nowcasting model, which estimates 3.3 percent.

April’s annual inflation rate could also tick up to 3.6 percent, the regional central bank’s forecast.

Crude oil prices have been the biggest driver of higher short-term inflation expectations.

With U.S. crude topping $100 per barrel, gasoline prices have followed the same upward trajectory—putting pressure on consumers’ wallets.

As of April 9, the national average for a gallon of gasoline is almost $4.17, far higher than the $2.85 recorded before the war began.

Conversely, the war’s influence on core inflation remains limited, as the year‑over‑year rate is expected to tick up only modestly, to 2.7 percent from 2.5 percent.

Monetary Policy in Spotlight

Several Fed officials have argued that structural inflation—removing tariffs and the oil shock—is likely only slightly above the institution’s 2 percent target.

The risk, however, is that the longer the war drags on and the longer energy markets remain elevated, the greater the inflation threat.

Because of persistent inflation fears, a chorus of participants at last month’s Federal Open Market Committee meeting were open to the idea of keeping a rate hike on the table, according to minutes published on April 9.

Most agreed that a return to the 2 percent inflation target could be “slower than previously expected,” citing higher oil prices.

Still, many officials expect interest rates to be lowered this year, although some had pushed out their projections for looser monetary policy.

“Many participants judged that, in time, it would likely become appropriate to lower the target range for the federal funds rate if inflation were to decline in line with their expectations,” the meeting summary stated.

In recent weeks, a panoply of central banks—from the Bank of Japan to the European Central Bank—has weighed the prospect of rate hikes to grapple with renewed price pressures.

Such hikes may have the blessing of International Monetary Fund (IMF) Director Kristalina Georgieva.

“If inflation expectations threaten to break anchor and ignite a costly inflation spiral, then central banks should step in firmly with rate hikes,” she said at the IMF-World Bank Spring Meetings on April 9.

“Fiscal support should remain targeted and temporary. Rate hikes, of course, would further dampen growth—that’s how they work.”

Although short-term inflation expectations have increased, long-term projections are stable.

For example, the one-year inflation outlook rose to 3.4 percent, while the five-year-ahead horizon was unchanged at 3 percent, according to the New York Fed’s Survey of Consumer Expectations.

Based on market movements, companies are not expecting $100 oil to be the new norm, said Josh Rubin, client portfolio manager at Thornburg Investment Management.

“Many energy companies are not necessarily pricing in $90 or $100 oil in perpetuity. Instead, they’re assuming those price levels hold for the next six months, with prices then fading back into the $60s or $70s,” Rubin said in a note emailed to The Epoch Times.

Consumer Health

In addition to PCE inflation readings, the bureau released updates to consumers’ pocketbooks.

Personal incomes fell by 0.1 percent in February, from a 0.4 percent gain at the start of the year. This came in below economists’ forecasts and was the first decline since May 2025.

February’s drop reflected sizable decreases in personal dividend income ($38.4 billion) and current transfer payments ($21.6 billion).

However, they were offset by a sizable increase in employee compensation ($32.9 billion).

Consumer spending accelerated by 0.5 percent, from the 0.3 percent jump in January—matching consensus estimates.