PCE Inflation Comes in Hotter Than Expected, Reinforcing the Fed’s Cautious Stance

U.S. inflation data for December delivered a mild upside surprise, with the Personal Consumption Expenditures (PCE) price index rising to 2.9% year over year, slightly above market expectations of 2.8%. The figures suggest that inflation pressures remain sticky as the year closed, even as broader disinflation trends continue to unfold.

On a monthly basis, headline PCE inflation increased by 0.4%, exceeding forecasts of a 0.3% rise and accelerating from the previous month. More notably, core PCE inflation—excluding food and energy—climbed to 3.0% year over year, also topping expectations and marking a clear step up from earlier readings. Core prices rose 0.4% on the month, underscoring persistent underlying price pressures.

The income and spending data painted a mixed picture of consumer momentum. Personal income rose by 0.3%, broadly in line with expectations, while personal spending also increased by 0.4%. However, when adjusted for inflation, real personal spending edged up by just 0.1%, signaling a moderation in consumers’ purchasing power toward the end of the year.

Despite the firmer inflation readings, financial markets showed little reaction. Investors continue to price in multiple interest rate cuts later in the year, with expectations centered on easing beginning around mid-year. The data did little to disrupt that outlook, even though inflation remains closer to 3% than to the central bank’s long-term 2% target.

The PCE report carries particular weight for policymakers because it is the inflation gauge most closely monitored by the Federal Reserve. Unlike the Consumer Price Index, the PCE captures a broader range of consumer costs, including expenses paid on behalf of households, and adjusts for changes in consumer behavior when prices shift. This makes it a more comprehensive measure of inflation trends across the economy.

Two versions of the report typically draw the most attention: the headline PCE index and the core PCE index. While headline inflation reflects overall price movements, core PCE strips out volatile food and energy prices to provide a clearer view of long-term inflation dynamics—an essential input for monetary policy decisions.

Taken together, the December data reinforce the message that inflation progress remains uneven. While price growth is well below its peak, it has not cooled decisively enough to remove policy caution. With labor market conditions still resilient and inflation running above target, the path to rate cuts may prove less smooth than markets currently anticipate.