The latest Personal Consumption Expenditures (PCE) inflation report for January 2025 suggests that price increases are beginning to slow, offering a potential sign of relief after months of stalled progress. The report indicates a 2.5% annual rise, down from 2.6% in December, marking the first decline in four months.
This article appeared on Investopedia, reporting on the latest inflation data and its implications for the Federal Reserve’s monetary policy. While the PCE report supports expectations of cooling inflation, persistent uncertainties suggest that interest rate cuts may remain off the table for now.
Federal Reserve’s Preferred Inflation Measure Signals Slowdown
The PCE index, considered the Federal Reserve’s primary measure of inflation, plays a critical role in shaping monetary policy. While both the CPI and PCE track inflation, the PCE provides a broader measure, capturing changes in consumer spending across a wider range of goods and services.
The latest figures indicate a slight deceleration, with core PCE inflation—which excludes volatile food and energy prices—falling to 2.6% from 2.9% in December. This is the lowest level recorded since June 2024, suggesting that underlying inflationary pressures may be moderating.
Federal Reserve officials have maintained that they require consistent evidence of declining inflation before considering interest rate cuts. The latest PCE report, while encouraging, may not be sufficient to prompt an immediate change in policy.
Discrepancy Between CPI and Pce Adds Complexity
A key element of the latest data is the contrast between the CPI and PCE inflation measures. While the PCE shows a cooling trend, the CPI recorded an unexpected rise in January, raising questions about the reliability of inflation forecasts.
The CPI is heavily influenced by housing costs, whereas the PCE reflects a broader spectrum of consumer expenditures. As a result, short-term fluctuations in rental prices and housing costs can cause temporary divergences between the two indices.
Economists suggest that the surprising CPI increase in January could be due to data collection variations rather than a fundamental resurgence of inflation. However, the mismatch between the two reports complicates the Federal Reserve’s decision-making process, making it difficult to determine whether inflation is truly stabilising.
Interest Rate Outlook Remains Uncertain
Despite signs of slowing inflation, the Federal Reserve remains hesitant to lower interest rates. The central bank held its benchmark rate steady in January, keeping borrowing costs at their highest level in over two decades. Policymakers have emphasised that any rate cuts will be contingent on sustained progress toward the 2% inflation target.
According to Gus Faucher, chief economist at PNC, the Federal Reserve is unlikely to ease monetary policy until core PCE inflation declines further. While some analysts anticipate a rate cut as early as May, others warn that factors such as wage growth and potential trade disruptions could delay any adjustments until late 2025 or beyond.
Potential Impact of New Trade Policies
Adding further uncertainty to the inflation outlook are proposed tariffs from former President Donald Trump, which could drive up prices on a range of imported goods.
The tariffs, set to take effect next week, may contribute to higher inflation in the coming months, counteracting some of the recent progress in price stabilization. Trade restrictions often lead to supply chain disruptions and increased costs, which are ultimately passed on to consumers.
