U.S. Inflation Stays Hot as Fed Holds Steady Ahead of Rate Decision

TLDR

• Core PCE inflation rose 3.1% year-on-year in January, above the Fed’s 2% target
• Monthly core PCE came in at 0.4%, in line with expectations
• Headline PCE was 2.8% annually, slightly below the expected 2.9%
• Markets widely expect the Fed to hold interest rates at 3.5%–3.75% at its next meeting
• The data predates the Iran conflict, which has pushed oil prices higher and clouds the inflation outlook

The Bureau of Economic Analysis released its January personal consumption expenditures (PCE) data on March 13, 2026. The PCE index is the Federal Reserve’s preferred tool for tracking inflation.

Core PCE, which strips out food and energy prices, rose 3.1% year-on-year in January. That matched analyst expectations but came in faster than December’s reading of 3.0%. On a monthly basis, core PCE rose 0.4%, also in line with forecasts.

The headline PCE figure — which includes all goods and services — grew 2.8% year-on-year. That was slightly below the expected 2.9% and cooler than December’s pace.

Month-on-month, headline PCE rose 0.3%, meeting expectations.

The Fed has a 2% inflation target. With core PCE sitting at 3.1%, prices are still well above where the central bank wants them.

Markets are betting the Fed will keep rates unchanged at 3.5% to 3.75% when policymakers meet next week. Rate cuts are not expected anytime soon given the persistent inflation data.

PCE has been running hotter than the separate Consumer Price Index from the Labor Department. The gap is mainly due to different weighting for housing and healthcare costs. The PCE index gives less weight to shelter costs, which have been cooling, and more weight to medical expenses, which have been rising.

February’s CPI came in at 2.4% year-on-year — more tame by comparison.

What the Data Doesn’t Capture

The January report reflects economic conditions from more than a month ago. It does not include the impact of the Iran conflict, which began with U.S. and Israeli air strikes in late February.

Oil prices have climbed sharply since the fighting started. Higher oil costs tend to push inflation higher in the months ahead.

The economic picture is further complicated by wide-reaching tariffs and heavy corporate spending on artificial intelligence. Both are already affecting the economy but are hard to quantify in real time.

Paul Ashworth, Chief North America Economist at Capital Economics, said the U.S. is a net oil exporter, so the impact of rising oil prices may be limited. He noted that while higher energy costs could initially hurt household spending power, any boost to investment would take time to filter through.

Personal spending grew 0.4% in January from the prior month, beating expectations. Personal income growth, however, slowed slightly.

What Comes Next

Fourth-quarter 2025 GDP growth was revised down sharply to just 0.7%.

Ashworth expects the economy to rebound in the first quarter of 2026, partly because the drag from a government shutdown in late 2025 is expected to ease.

The Fed’s next interest rate decision is due at the end of a two-day meeting next week. Based on current market pricing, rates are expected to remain on hold.

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