The Federal Reserve’s preferred inflation gauge, the Core Personal Consumption Expenditures (Core PCE) Price Index, showed renewed upward pressure in December, according to data released an hour ago by the Bureau of Economic Analysis (BEA). The report immediately reverberated across financial markets, lifting Treasury yields, supporting the US dollar, and pressuring equity futures as investors reassessed the path of interest rates in 2026.
Core PCE Accelerates
According to the BEA’s December 2025 Personal Income and Outlays report, core PCE, which excludes volatile food and energy prices, rose 0.3% month-over-month. On an annual basis, core inflation climbed 2.9%, reflecting a modest reacceleration compared with prior months and remaining above the Federal Reserve’s 2% target.
Headline PCE inflation also increased, while overall consumer spending remained resilient, suggesting that demand conditions continue to provide underlying support for price pressures.
The data reinforces a theme that has defined early 2026 economic releases: inflation progress has slowed, and price stability remains incomplete.
Why Core PCE Matters Most
The Core PCE Price Index carries particular importance because it is the Federal Reserve’s primary inflation benchmark. Unlike CPI, PCE adjusts for changes in consumer behavior and carries different weighting across categories, making it the Fed’s preferred gauge for policy decisions.
Today’s reading suggests that disinflation remains uneven, especially within services categories, which continue to show stickier price growth. With wage growth still firm and labor markets stable, underlying inflation momentum appears more persistent than many investors had anticipated at the end of 2025.
Market Reaction: Yields Rise, Stocks Wobble
Financial markets reacted quickly following the release:
- US Treasury yields climbed, particularly across the 2-year and 10-year maturities, as traders reduced expectations for near-term rate cuts.
- The US dollar strengthened against major currencies, reflecting higher yield support and a repricing of Fed policy expectations.
- Equity markets turned cautious, with rate-sensitive technology and growth stocks facing modest pressure as investors recalibrated valuations in a potentially higher-for-longer rate environment.
Gold prices edged lower in early trading, as firmer yields and a stronger dollar weighed on the precious metal.
Consumer Spending Remains Firm
The BEA report also showed that personal income and consumer spending increased in December, reinforcing the narrative of a resilient US economy. Strong consumption supports growth but also complicates the inflation outlook, as sustained demand can delay the cooling of service-sector prices.
Analysts note that the combination of solid spending and persistent core inflation reduces the urgency for the Federal Reserve to pivot aggressively toward easing.
Implications for the Federal Reserve
The December Core PCE data comes at a sensitive time for policymakers. After cutting rates in late 2025, the Fed has shifted toward a more cautious, data-dependent stance. Recent FOMC communications emphasized patience and vigilance regarding inflation risks.
Today’s inflation reading strengthens the argument among more hawkish policymakers that rate cuts should proceed gradually, if at all, until clearer evidence emerges that inflation is sustainably moving toward 2%.
Market-implied probabilities for additional cuts later in 2026 adjusted lower following the report, with traders now pricing in a slower easing trajectory.
The Bigger Picture: Inflation Still Not Fully Defeated
While inflation has come down significantly from its multi-year highs, today’s report underscores that the final stretch toward 2% may prove more difficult. Services inflation, housing-related components, and wage-linked categories continue to exert upward pressure.
Economists warn that if core inflation remains near or above 3% for several more months, the Fed could delay further rate reductions, keeping financial conditions tighter than markets had expected entering the year.
What Traders Are Watching Next
Following the Core PCE release, attention now shifts to:
- Upcoming labor market data
- CPI and wage growth trends
- Future Fed speeches and guidance
- Bond market reactions and yield curve movements
Any additional signs of sticky inflation could further dampen expectations for aggressive monetary easing.
Bottom Line
The latest Core PCE Price Index report delivered a clear message: inflation remains elevated and progress toward the Fed’s 2% target is not yet secure. With prices rising 0.3% in December and annual core inflation at 2.9%, policymakers are likely to maintain a cautious stance.
For markets, the implications are immediate, stronger yields, a firmer dollar, and renewed debate over how quickly the Federal Reserve can ease policy in 2026.
Investors now face a familiar question: Is this a temporary bump in inflation, or a signal that the fight against rising prices is not over yet?
