Inflation Firms as Growth Begins to Tire

New U.S. data indicate that price pressures are proving more persistent than initially expected.

Core PCE, the Federal Reserve’s preferred inflation measure, rose by roughly 0.4% monthly for a third consecutive month, a pace that keeps inflation uncomfortably warm. The message is clear: progress is happening, but not fast enough to give policymakers confidence that the battle is nearly won.

Services Keep the Pressure Alive

On an annual basis, core inflation remains close to 3%, still noticeably above the Fed’s 2% target. Headline PCE followed a similar monthly path, yet the real concern sits within the details. Services inflation excluding housing continues to hold firm, suggesting that price increases are settling into the system rather than fading away. This persistence makes the final stretch toward stable inflation more demanding than earlier phases of the cycle.

Consumers Show Early Signs of Fatigue

Demand, once the engine of resilience, is beginning to lose some speed. Personal spending, adjusted for inflation, came in softer than expected, hinting that households are becoming more selective with their purchases. Income data also disappointed, reinforcing the sense of a more cautious consumer backdrop. Spending has not collapsed, but the steady momentum that defined the past year is clearly slowing.

Growth Shifts Into a Lower Gear

Revisions to economic output reinforce that shift. The final reading for fourth-quarter GDP was adjusted lower, signaling that underlying momentum was weaker than initially thought. Gross Domestic Income (GDI) provided some counterbalance with a stronger figure, yet the broader signal points to an economy moving forward at a steadier, more measured pace rather than charging ahead.

Trouble for the Federal Reserve

Current signals leave policymakers walking a narrow line. Inflation remains firm enough to keep rate cuts on hold, while cooling demand limits the appetite for further tightening. The result is a policy outlook defined by patience and precision. Markets are no longer waiting for a quick pivot; they are adjusting to the reality of a slower, more deliberate path shaped by each new data release.

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