The BEA's Personal Income and Outlays report showed inflation remained elevated at the start of 2025. The Fed’s preferred inflation gauge, the PCE price index, rose 2.5% year-over-year in January and 0.3% from December, as expected. The core PCE price index, which excludes food and energy, rose 2.6% year-over-year and 0.3% from December, as expected.
PCE Price Index
Personal consumption expenditures (PCE) measures and tracks changes for all domestic personal consumption. Core PCE measures the changes in personal consumption less food and energy, making it less volatile than the headline PCE. The PCE Price Index is calculated using PCE data and is a key way to measure changes in purchasing trends and inflation.
The adjacent thumbnail gives us a close-up of the trend in YoY core PCE since January 2012. The first string of red data points highlights the 12 consecutive months when core PCE hovered in a narrow range around its interim low. The second string highlights the lower range from late 2014 through 2015. Core PCE shifted higher in 2016 with a decline in 2017, 2019, and 2020, with a major jump in 2022.
The next chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. Also included is an overlay of the core PCE (less food and energy) price index, which is Fed's preferred indicator for gauging inflation. The 2% benchmark is the Fed's conventional target for core inflation.
For a long-term perspective, here are the same two metrics spanning five decades.
Inflation: Fed's 2% Target
The Fed traditionally uses the PCE Price Index as their preferred inflation gauge however another common measure of inflation is the Consumer Price Index. For an analysis on how these two inflationary measures stack up, check out our Two Measures of Inflation update.
In the wake of the Great Recession, 2% has been the Fed's target for core inflation. In August 2020, Fed Chairman Jerome Powell introduced a policy that not only allows for a level above 2% but welcomes it.
"In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time." See Statement on Longer-Run Goals and Monetary Policy Strategy update (revised January 2021).
The COVID-19 pandemic helped launch inflation into its highest levels since the 1980s. As a result, the Fed has been battling high inflation over the past few years with its monetary policy. Inflation has eased off of its 2022 highs, however the back half of 2024 has shown just how sticky it can be.
More Fixed Income Topics >
The adjacent thumbnail gives us a close-up of the trend in YoY core PCE since January 2012. The first string of red data points highlights the 12 consecutive months when core PCE hovered in a narrow range around its interim low. The second string highlights the lower range from late 2014 through 2015. Core PCE shifted higher in 2016 with a decline in 2017, 2019, and 2020, with a major jump in 2022.
