The US Bureau of Economic Analysis will release the January Personal Consumption Expenditures (PCE) price index at 8:30 AM ET today. Economists expect headline PCE to rise 2.9% year-on-year, flat from prior, with a monthly gain of 0.3% slightly slowing from 0.4%. The core PCE, the Fed's preferred inflation gauge, is forecast to accelerate to 3.1% year-on-year, marking the largest increase since April 2024 and well above the central bank's 2% target.
CPI vs PCE Weighting Divergence
The differing trajectories of CPI and PCE stem from how each index weights its components. The Labor Department's CPI heavily weights shelter costs; the "rent of primary residence" sub-index rose only 0.1% in January, the smallest in five years, and used car prices fell for a third straight month, dragging down CPI. In contrast, PCE gives more weight to categories such as computer software and jewelry. Barclays, Morgan Stanley, and Bank of America note these items saw notable price increases in February CPI data and have a much larger impact on PCE. The three banks expect core goods PCE to rise by at least 0.8% month-on-month in February, roughly ten times the gain implied by the comparable CPI reading.
The "Milder PCE" Norm Is Fraying
PCE has historically run below CPI, earning a reputation as the "milder" inflation metric and the Fed's preferred guide. That norm is now under pressure. After dissecting cross-linked CPI components, economists warn that January's reading is worrying and February is shaping up even worse. Some analysts project a second consecutive 0.4% monthly gain for core PCE in February, with an upside skew. Compounding the issue: the data deterioration has occurred before the US-Iran conflict erupted, and rising energy and fertilizer costs have not yet fully fed through.
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- Headline PCE (Jan est.): +2.9% YoY (flat), +0.3% MoM
- Core PCE (Jan est.): +3.1% YoY, +0.4% MoM – largest annual gain since April 2024
- Feb core PCE preview: Barclays, Morgan Stanley, BofA see core goods MoM at least +0.8%
For the Federal Reserve, persistently high core PCE narrows the window for a June rate cut. After the January CPI release, markets briefly pushed June cut odds to 51%. Should tonight's PCE land at or above expectations, the case for holding rates will strengthen, forcing a repricing of the rate-cut timeline.