Two Measures of Inflation: January 2026

Core Inflation Measures - Inflation remains a significant concern, with the core Personal Consumption Expenditures (PCE) at 3.1% and core Consumer Price Index (CPI) at 2.5%, both above the Federal Reserve's 2% target [1][2] - The Federal Reserve uses PCE data as its primary inflation gauge, emphasizing core inflation that excludes volatile food and energy prices [2][3] Federal Reserve's Actions - The Federal Reserve held the federal funds rate steady in the range of 3.50%-3.75%, following three consecutive rate cuts of 25 basis points each, marking the lowest level since November 2022 [3][4] - The Fed is expected to maintain rates in the upcoming meeting, with a 99% likelihood of holding rates steady according to the CME FedWatch Tool [4] Comparison of PCE and CPI - Core PCE is less volatile than core CPI, making it a more reliable indicator for the Fed, which aims for price stability and maximum employment [6] - Historically, core CPI has shown more volatility, consistently registering higher readings than core PCE nearly 80% of the time since 1960, with an average difference of 48 basis points [10] Historical Trends - Since 1960, core CPI has grown by 988%, while core PCE has increased by 712%, indicating a significant difference in inflationary growth rates [11] - The COVID-19 pandemic led to the highest inflation rates since the early 1980s, with core PCE peaking at 5.57% in February 2022 and core CPI at 6.63% in September 2022 [8]