Forecasts for January PCE Report Show Inflation Remaining Elevated

Key Takeaways

• Inflation has fallen dramatically since peaking in 2022, but it remains above the Federal Reserve’s 2% target.
• The annual rate of core PCE inflation is expected to drop from 2.8% in December to 2.6% in January.
• The Fed is expected to hold interest rates steady at its next meeting in March and through much of this year.

Forecasts for the January Personal Consumption Expenditures Price Index report suggest overall inflation remains higher than Fed officials and investors would like.

In January, economists expect that overall PCE inflation rose 0.3% on a monthly basis and 2.5% on an annual basis, according to FactSet’s consensus estimates. They anticipate that the core measure of PCE inflation, which excludes volatile food and energy prices, rose 0.3% on the month and 2.6% on the year.

Even factoring annual seasonal adjustment into the data, Nationwide financial market economist Oren Klachkin says inflation is still looking sticky thanks to strong economic conditions. “When you have an economy that continues to run relatively well, the side effect of that is that inflation continues to run high,” he explains. “That is the kind of environment we were in late last year, and I think that is still the case now … we’re still in a relatively elevated inflation environment overall.” Klachkin’s team is expecting 0.3% monthly growth for both the overall and core measures of PCE.

Much of the source data for the PCE report is released earlier in the month as part of other datasets, including the Consumer and Producer Price Indexes. That means economists already have a good idea of what Friday’s report will look like.

Hot CPI inflation data in January suggested “core PCE could be locked in a range of 2.5-3.0%, slightly elevated versus the Fed’s 2% target for PCE inflation,” noted Morningstar senior US economist Preston Caldwell earlier this month.

January PCE Report Highlights

• PCE report release date and time: Friday, Feb. 28, at 8:30 a.m. EDT
• The PCE Price Index is forecast to rise 0.30% in January after rising 0.26% in December.
• Core PCE is forecast to rise 0.30% in January after rising 0.16% in December.
• Year over year, the PCE Price Index is forecast to rise 2.5% in January after increasing 2.6% in December.
• Core PCE year over year is forecast to rise 2.6% in January after increasing 2.8% in December.

Inflation overall has fallen dramatically from its peak in the summer of 2022. Much of that progress is attributable to improvement on the goods side of the equation, while the services category has remained sticky. Klachkin says this dynamic is already fading, and that it could diminish further if the Trump administration implements the new tariffs they’ve been threatening.

Klachkin says he sees upside risk in the accommodation category, which includes prices for hotels, restaurants, and other leisure and hospitality businesses. He expects falling gas prices to offset some of the upward pressure on PCE.

When Will the Fed Cut Rates?

With both inflation and Trump administration policy looking uncertain, Fed officials are not expected to reduce interest rates from their current range of 4.25%-4.50% when they meet next month.

“I don’t think anything is going to change out of the Fed as a result of the data we get on Friday,” Klachkin explains. “The Fed has already clearly said they are on hold until they have more certainty that inflation will slow down and more certainty about economic policy.”

Bond futures markets see a 97.5% chance that the central bank will leave rates unchanged in March, according to the CME FedWatch tool, and a 55% chance that the first rate cut of 2025 will come at the March meeting.