The Fed's Favorite Measure Of Inflation Was Hotter Than Expected at the End of 2025

Key Takeaways

• The Personal Consumption Expenditures price index rose 2.9% over the year in December, exceeding forecaster expectations and hitting their highest level since March 2024.
• Core PCE, which excludes volatile food and energy costs, rose 3%, the highest level since last February.
• The report is another indication that the Federal Reserve’s efforts to push inflation down to a 2% annual rate have a long way to go, and could put pressure on the Fed to keep interest rates high.

After a turbulent year, the Federal Reserve’s favorite measure of inflation ended 2025 higher than where it began.

Consumer prices as measured by Personal Consumption Expenditures rose 2.9% over 12 months in December, up from a 2.8% annual increase in November and reaching the highest since March 2024, the Bureau of Economic Analysis said Friday. That was higher than the 2.8% annual inflation rate forecasters had expected according to a survey of economists by_ Dow Jones Newswires_ and The Wall Street Journal. “Core” prices excluding the volatile food and energy categories rose 3% over 12 months, the highest annual increase since February and in line with expectations.

What This Means For The Economy

Stubbornly high inflation squeezes household budgets and makes the Federal Reserve more reluctant to cut borrowing costs to stimulate the economy.

The uptick of core prices is especially noteworthy because it’s the benchmark used by officials at the Federal Reserve to determine if inflation is running at the Fed’s target of a 2% annual rate. That hasn’t been the case since 2021, when the pandemic disrupted supply chains and caused a surge of price hikes.

By the start of 2025 inflation was on the downswing, but began rising again in April after President Donald Trump’s “Liberation Day” announcement of sweeping tariffs on U.S. trading partners. Merchants have passed along tariffs to customers, pushing up prices for many products. However, overall inflation hasn’t risen severely partly because housing costs have leveled off.

Related Education

Personal Consumption Expenditures (PCE): What It Is and Measurement

What Is the Relationship Between Inflation and Interest Rates?

Stubbornly high inflation has implications for the Fed’s key interest rate as the central bank attempts to balance its dual mandate of keeping inflation in check and employment high. If inflation fails to decelerate in the coming months, it could prompt the Fed to keep the fed funds rate higher for longer, keeping upward pressure on borrowing costs for loans in hopes of discouraging borrowing and allowing supply and demand to rebalance.

The fed funds rate influences borrowing costs for all kinds of loans. Fed officials kept the rate steady in January after cutting it by a quarter-point at each of its three previous meetings to boost the faltering hiring market.

“This will trigger more concern inside the Fed that inflation needs a closer look again,” Heather Long, chief economist at Navy Federal Credit Union, wrote in a commentary.

The report was supposed to be released in January but was delayed by the government shutdown in October and November.

The PCE numbers came on the same day the government released fourth-quarter GDP data that showed economic growth was weaker than anticipated in the fourth quarter.

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