Even if CPI cools down, interest rate cuts remain unlikely? The US inflation indicators rarely "decouple," and strong PCE data may hinder the Federal Reserve's easing path

CNBC Finance APP has learned that early in 2026, different inflation indicators in the United States are showing discrepancies. The CPI report released on Wednesday shows that core inflation, excluding food and energy prices, was relatively moderate in January and February—surprising given that companies usually raise prices at the start of the year. However, economists expect another indicator favored by the Federal Reserve—the core PCE price index (to be released on Friday)—to perform strongly in January and February.

It is rare for the PCE price index to outpace the CPI. Usually, the opposite is true because housing costs have a higher weight in the CPI, often keeping it relatively high. Now, this gap appears to be widening. If core PCE inflation rises 3.1% over the year through January, as economists expect, it will be one of the largest differences compared to the annual core CPI growth in decades.

This divergence existed even before the Iran war, which caused oil prices to surge and reignited risks of accelerating inflation. This puts the Federal Reserve in a difficult position. Although markets widely expect policymakers to keep interest rates unchanged next week, if price pressures persist, officials will find it hard to cut rates in the coming months to support the fragile labor market.

Bank of America economists stated in a report: “Although CPI data remains moderate, the PCE inflation data does not strengthen the case for rate cuts, especially given the risk of rising oil prices.”

The PCE price index, compiled by the U.S. Bureau of Economic Analysis, is based on data from the CPI and covers multiple price categories. Following the latest CPI release, economists quickly raised their forecasts for the February core PCE price index, which will be published on April 9. Some predict the index will rise 0.4% for the second consecutive month, with some economists even expecting a larger increase.

This discrepancy stems from different weights assigned to various inflation components. The CPI, compiled by the U.S. Bureau of Labor Statistics, places a high emphasis on housing costs. A key indicator called “main rent of primary residence” rose only 0.1% in January, the lowest in five years. Additionally, the CPI assigns a significant weight to used car prices, which have fallen for three consecutive months.

On the other hand, the PCE price index focuses on significant increases in certain goods. Economists note that products like computer software and jewelry saw notable rises in the CPI in February, which have a greater impact on PCE inflation. Predictions from Barclays, Morgan Stanley, and Bank of America suggest that the February PCE core goods prices will increase by at least 0.8%, ten times the latest CPI report’s increase.

Regardless of the indicator, the Iran war is expected to push up U.S. inflation in March, already including recent surges in oil and gasoline prices. Diesel prices have also risen sharply, which will translate into higher transportation costs, and disruptions in regional fertilizer supplies are expected to drive up food prices.

Elizabeth Renter, senior economist at NerdWallet, stated in a report:
“The longer the conflict lasts, the greater the risk of pushing up overall inflation. Next month, we will definitely see energy prices rise, but higher gasoline prices will also lead to increases in other categories.”