Research
April 09, 2026
PCE Deflator
Core consumer inflation in line with expectations, up 3% year-over-year in February
The Personal Consumption Expenditures (PCE) deflator—the Federal Reserve’s preferred inflation gauge—rose 0.4% in February, up from 0.3% in January and marking the strongest monthly increase in 12 months. Food prices increased 0.3%, slightly faster than January’s 0.2% gain, while energy prices rebounded 0.8% after declining 1.7% in January. Notably, these data precede the outbreak of the conflict in Iran, which is likely to translate into significantly higher energy prices in March.
Core PCE inflation, which excludes food and energy, rose 0.4% for the second consecutive month. On a year-over-year basis, headline PCE inflation held steady at 2.8% in February, while core inflation edged down from 3.1% in January to 3.0%. Overall, the February report largely mirrors the dynamics observed in the prior month. Consumer inflation has trended higher in recent months, reaching rates not seen in nearly two years, though it remained relatively stable in February. Since the start of 2024, core inflation has averaged 2.9%.
Both headline and core inflation remain well below their respective peaks of 7.1% in June 2022 and 5.5% in September 2022. However, progress toward the Federal Reserve’s 2% target remains incomplete. In many respects, this report reads like a time capsule from just before the Iranian conflict, suggesting that inflationary pressures are likely to intensify in the near term.
This combination places the Federal Reserve in a difficult position. The labor market continues to show signs of cooling, yet inflation remains stubborn and appears poised to drift higher. As a result, the Federal Open Market Committee is likely to hold policy steady for the foreseeable future. While additional rate cuts remain possible in 2026, they are unlikely to occur before later in the year.
Beyond the inflation figures, personal consumption expenditures increased 0.5% in February, accelerating from 0.3% in January and marking the strongest monthly gain since August. Consumers, therefore, continued to spend at a solid pace despite lingering economic uncertainty. Spending at foodservices and accommodations also rose 0.5% in February, rebounding after being flat in December and declining 0.2% in January. Over the past year, total personal spending has grown a healthy 5.4%, while expenditures on foodservices and accommodations are up 4.8% since February 2025, pointing to resilient consumer demand even amid persistent headwinds and softer readings in recent months.
Some of this growth reflects higher prices, even as real spending advances at a more measured pace. Inflation‑adjusted personal consumption edged up 0.1% in February and is 2.5% higher than a year ago. Real spending on foodservices and accommodations has increased 1.7% over the past year. Even after adjusting for inflation, consumers continue to allocate more toward dining and travel—a positive signal for those sectors, albeit at a pace far more subdued than many would prefer.
Personal income edged down 0.1% in February, the first decline in 9 months. Personal income grew 3.7% over the past 12 months. Wages, which have been a large contributor to the economy’s resilience, rose just 0.2% in February, slowing down from 0.5% in January, with 4.3% growth year-over-year.
With spending rising and incomes down, the personal savings rate declined from 4.5% in January to 4.0% in February. Overall, the savings rates in the post‑pandemic period remain well below historical norms. Prior to the pandemic, the savings rate averaged 6.5% from 2017 to 2019, compared with an average of just 5.2% since the start of 2023. Moreover, savings over the past 10 months have consistently run below that already‑reduced pace.
Core PCE inflation, which excludes food and energy, rose 0.4% for the second consecutive month. On a year-over-year basis, headline PCE inflation held steady at 2.8% in February, while core inflation edged down from 3.1% in January to 3.0%. Overall, the February report largely mirrors the dynamics observed in the prior month. Consumer inflation has trended higher in recent months, reaching rates not seen in nearly two years, though it remained relatively stable in February. Since the start of 2024, core inflation has averaged 2.9%.
Both headline and core inflation remain well below their respective peaks of 7.1% in June 2022 and 5.5% in September 2022. However, progress toward the Federal Reserve’s 2% target remains incomplete. In many respects, this report reads like a time capsule from just before the Iranian conflict, suggesting that inflationary pressures are likely to intensify in the near term.
This combination places the Federal Reserve in a difficult position. The labor market continues to show signs of cooling, yet inflation remains stubborn and appears poised to drift higher. As a result, the Federal Open Market Committee is likely to hold policy steady for the foreseeable future. While additional rate cuts remain possible in 2026, they are unlikely to occur before later in the year.
Beyond the inflation figures, personal consumption expenditures increased 0.5% in February, accelerating from 0.3% in January and marking the strongest monthly gain since August. Consumers, therefore, continued to spend at a solid pace despite lingering economic uncertainty. Spending at foodservices and accommodations also rose 0.5% in February, rebounding after being flat in December and declining 0.2% in January. Over the past year, total personal spending has grown a healthy 5.4%, while expenditures on foodservices and accommodations are up 4.8% since February 2025, pointing to resilient consumer demand even amid persistent headwinds and softer readings in recent months.
Some of this growth reflects higher prices, even as real spending advances at a more measured pace. Inflation‑adjusted personal consumption edged up 0.1% in February and is 2.5% higher than a year ago. Real spending on foodservices and accommodations has increased 1.7% over the past year. Even after adjusting for inflation, consumers continue to allocate more toward dining and travel—a positive signal for those sectors, albeit at a pace far more subdued than many would prefer.
With spending rising and incomes down, the personal savings rate declined from 4.5% in January to 4.0% in February. Overall, the savings rates in the post‑pandemic period remain well below historical norms. Prior to the pandemic, the savings rate averaged 6.5% from 2017 to 2019, compared with an average of just 5.2% since the start of 2023. Moreover, savings over the past 10 months have consistently run below that already‑reduced pace.