New inflation data could send a ‘pause’ signal to the Fed

Subscribe to enjoy similar stories. The Federal Reserve’s preferred inflation gauge is expected to show prices rose faster in December, reinforcing policymakers’ increasing caution on cutting interest rates. The consensus call among economists surveyed by FactSet is that core personal consumption expenditures, which don’t include volatile food or energy prices, rose 0.37% in December from the prior month and 3.0% from a year earlier, up from 2.8% in November.

Headline PCE is forecast to increase 0.3% on the month and 2.7% year over year. A monthly gain of 0.37%, translating to an annualized pace well above the Fed’s 2% target, would suggest that progress on reducing inflation has slowed after steadying in recent months, following a series of increases that began last April. Core inflation would be back at 3%, making it clear it hasn’t achieved the “clear and convincing" decline many policymakers have said they need to see before cutting rates again.

Minutes from the Fed’s January meeting, released Wednesday, showed officials setting a higher bar for additional easing in 2026. Policymakers emphasized the need for more evidence that inflation is moving sustainably toward the bank’s target and acknowledged that monetary policy may need to remain restrictive for some time if price pressures fail to cool. Still, markets continue to expect rate cuts later this year.

More than half of investors see at least a quarter-point cut by June, according to the CME FedWatch tool. A firm PCE reading on Friday would strengthen the argument that the Fed needs to wait. With unemployment relatively stable and economic activity holding up, inflation near 3% would give officials little reason to rush.