Treasuries steady as core PCE, 1.4% GDP shape Fed path

Q4 core PCE price index 2.7% annualized signals sticky inflation

The Bureau of Economic Analysis (BEA) reported that the U.S. core pce price index rose at a 2.7% annualized pace in Q4, coming in higher than expected. This measure reflects quarter-over-quarter inflation, annualized, and differs from commonly cited year-over-year rates.

The reading underscores lingering price pressures in the components the federal reserve prioritizes for policy, particularly services. While disinflation progressed earlier in 2025, the latest quarterly momentum suggests inflation has not yet settled near 2%.

Why it matters for Federal Reserve rate cuts

Because the Fed targets 2% inflation, measured on the PCE framework, a higher-than-expected 2.7% annualized core reading complicates the case for near-term easing. Policy sequencing remains data-dependent, with officials emphasizing confidence in the path back to target before cutting.

Officials have recently stressed patience as progress has become uneven. “Inflation progress has stalled,” said Federal Reserve Governor Lisa Cook, as reported by Barron’s.

Chair Jerome Powell has noted that some goods-price pressures linked to tariffs appear one-time and could fade if they do not spill over into services, according to Yahoo Finance UK. Even so, policymakers continue to watch core services, particularly ex-housing, before signaling firm timing on rate cuts.

U.S. Q4 real GDP grew 1.4% annualized, while December core PCE inflation held near 3% year over year, as reported by Meyka. That mix, slower growth alongside stickier core inflation, argues for caution on the pace of policy normalization.

Equities were resilient into the latest stretch, with the S&P 500 up 0.69% and the Dow Jones Industrial Average up 0.47% on Friday, according to MAAAL. At the time of this writing, markets appear to be balancing resilient earnings against a slower disinflation trajectory.

Policy signals point to a longer verification phase rather than a preset path to easing. A sequence of softer core services readings and sustained progress toward 2% would likely be needed before the Fed pivots decisively.

PCE vs CPI: housing weight and services inflation

PCE vs CPI housing weight: why PCE is less housing-heavy

Housing carries roughly half the weight in PCE compared with CPI, which helps explain why PCE is pushed down far less by shelter-methodology effects, as reported by Wolf Street. This difference can produce notable divergences between the two inflation gauges.

Services ex-housing dynamics behind the core PCE price index

Core PCE excludes food and energy and captures a broad set of services that households purchase via out-of-pocket spending and third-party payers. Services ex-housing has been the stickier segment, and its cooling is central to durable disinflation.

FAQ about core PCE price index

How is PCE different from CPI, especially regarding housing weights and services inflation?

PCE assigns a lower housing weight than CPI and uses chain-weighting, capturing substitutions. This often makes PCE less shelter-driven and more sensitive to services consumed across payers.

What does this core PCE data mean for the timing and pace of Federal Reserve rate cuts?

A 2.7% annualized core PCE suggests patience. The Fed is likely to wait for consistent core-services cooling and greater confidence in returning inflation to 2%.