The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures price index, showed consumer prices increased 0.3% monthly and 2.8% annually in January 2026. Core inflation came in at 3.1% annually, a full percentage point above the Fed's 2% target. This data, collected before Iran war impacts on oil prices, presents a concerning setup for inflation in the coming months.

Economic growth was revised down to 0.7% for Q4 2025. Tariffs announced by President Trump have contributed to goods inflation, while shortages from the AI boom affect tech equipment prices. Health care services continue experiencing inflation. The PCE index runs slightly hotter than the more commonly cited Consumer Price Index, with both measures expected to climb higher as oil prices rise to $90 from $60 levels.

Consumer spending held up but remained flat on inflation-adjusted basis. The economy added just 116,000 jobs in 2025, with employers cutting jobs in two of the past three months. The Fed faces a treacherous balancing act between price stability and maximum employment, with investors urging rate stability despite the oil shock that threatens growth.