Inflation PCE in the US in December 2025 was 2.9%. year to year, which turned out to be higher than in November, when it was 2.8 percent. – the Commerce Department's Bureau of Economic Analysis reported on Friday. This result is slightly above expectations: forecasts assumed the stabilization of the indicator at the level of 2.8%.
The core PCE index, which does not take into account food and energy prices, was 3% in December 2025. year to year, which was also higher than forecast (forecast 2.9%). Although core inflation has declined significantly in the last few years (even exceeding 5% at the end of 2022), it is still above the Fed's target of 2%.
On a monthly basis the core PCE inflation rate in December was 0.4 percent, which also exceeded forecasts (0.3 percent was assumed) and accelerated from 0.2 percent. in November. The monthly growth rate of the headline PCE inflation rate also jumped to 0.4 percent in December. from 0.2 percent in November (0.3% was also assumed here).
The Commerce Department's Bureau of Economic Analysis also reported that in December 2025 American consumer spending increased by 0.4%. month to month. This reading is in line with forecasts and the same as in November (downward revision from 0.5%). This pace is once again lower than Americans' incomes have increased: it was reported today that in December 2025 they increased by 0.3%. on a monthly basis. This reading is in line with forecasts and slightly higher than November's 0.4%. (upward revision from 0.3%).
What is PCE inflation. This is a key metric for the Fed
PCE (Personal Consumption Expenditures) is a measure of changes in prices of goods and services purchased by consumers. It is the Federal Reserve's preferred indicator for monitoring inflation because it is believed to better reflect actual inflation and price pressures in the economy. The Fed's average inflation target is 2%.
The difference between CPI and PCE is the scope and method of weighting prices in both indicators. The CPI measures changes in the prices of goods and services consumed by urban households and is mainly focused on consumers' shopping experiences. PCE also covers the expenses of people who do not live in cities and has a wider range of goods and services. Additionally, PCE uses a different weighting methodology that is designed to better reflect changes in consumer spending habits, adjusting for changes in prices through shifts in spending between different goods and services.
The Federal Reserve's conundrum
On Friday, we also learned the first preliminary data on GDP dynamics in the USA in the fourth quarter of 2025. They show that there has been a clear slowdown in economic growth. Given weaker economic activity and elevated inflation, the Federal Reserve will have a tough time.
Recently, the economic data and, above all, the labor market data were so good that central bankers in the US felt comfortable and could patiently keep interest rates at a higher level. Let us recall that the Fed has a double mandate: it must care for price stability and employment. A possible economic deterioration and an increase in unemployment could suggest the need for faster rate cuts to stimulate economic activity, but on the other hand, inflation does not let up, which does not allow for bold cuts in the cost of money.
However, it is worth remembering that GDP growth in the world's largest economy in the fourth quarter was reduced due to the shutdown and today's reading is not enough, that the Fed should accelerate interest rate cuts and at the meeting on March 18 – as the market assumes – they will probably remain unchanged. A maximum of two cuts of 0.25 basis points each are expected throughout the year, and the first cut may be in June at the earliest. To change these forecasts, surprises in terms of inflation and the situation on the labor market would be necessary.
At the end of January, the Fed kept interest rates unchanged at 3.50-3.75%. During the three previous meetings, held in December, October and September, interest rates in the world's largest economy were cut by 25 basis points each time. In total, the cost of money in the US fell by 75 basis points during this time. The September meeting was crucial because the Fed returned to easing its monetary policy after almost a year of pause.
