US core PCE inflation expected to remain sticky, reinforcing Federal Reserve’s cautious stance on rate cuts
- The core Personal Consumption Expenditures Price Index is expected to rise 0.3% MoM and 2.7% YoY in February.
- Markets expect the Federal Reserve to hold the policy setting unchanged in May.
- Annual PCE inflation is forecast to hold steady at 2.5%.
The United States (US) Bureau of Economic Analysis (BEA) is set to release the Personal Consumption Expenditures (PCE) Price Index data for February on Friday at 12:30 GMT. This index is the Federal Reserve’s (Fed) preferred measure of inflation.
PCE inflation data is usually seen as a big market mover because it is taken into account by Fed officials when deciding on the next policy move. While speaking in the press conference after the March meeting, Fed Chairman Jerome Powell noted that it would not be the right thing to tighten policy if the inflationary impulse would go away on its own. “We will know in a couple of months if higher goods inflation in the first two months of the year was from tariffs,” he added.
Anticipating the PCE: Insights into the Fed's key inflation metric
The core PCE Price Index, which excludes volatile food and energy prices, is projected to rise 0.3% on a monthly basis in February, matching January’s increase. Over the last twelve months, the core PCE inflation is forecast to edge higher to 2.7% from 2.6%. Meanwhile, the headline annual PCE inflation is seen holding steady at 2.5% in this period.
The Fed decided to leave the interest rate unchanged at 4.25%-4.50% in March. The revised Summary of Economic Projections (SEP), published alongside the policy statement, highlighted that policymakers are projecting a total of 50 bps reduction in the policy rate in 2025. Additionally, the publication showed that the end-2025 PCE inflation and core PCE inflation forecasts are revised higher to 2.7% and 2.8%, respectively, from 2.5% seen in December’s SEP.
Previewing the PCE inflation report, TD Securities said: “We look for core PCE prices to remain sticky, rising 0.3% m/m for a second month straight in February. Note that the core CPI rose a softer 0.23% m/m. Headline PCE inflation should come in slightly softer at 0.28%. On a y/y basis, core PCE inflation is likely to rise by a tenth to 2.7%. Personal spending likely partly recovered after contracting for the first time since March 2023.”
Economic Indicator
Personal Consumption Expenditures - Price Index (YoY)
The Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The YoY reading compares prices in the reference month to a year earlier. Price changes may cause consumers to switch from buying one good to another and the PCE Deflator can account for such substitutions. This makes it the preferred measure of inflation for the Federal Reserve. Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.
Read more.Next release: Fri Mar 28, 2025 12:30
Frequency: Monthly
Consensus: 2.5%
Previous: 2.5%
Source: US Bureau of Economic Analysis
How will the Personal Consumption Expenditures Price Index affect EUR/USD?
Market participants will likely react to an unexpected reading in the monthly core PCE Price Index, which is not distorted by base effects. A print of 0.4% or higher in this data could support the US Dollar (USD) with an immediate reaction. On the other hand, a reading below 0.2% could have the opposite effect on the USD’s performance against its major rivals.
According to the CME FedWatch Tool, markets currently see about a 10% chance of a 25 basis points (bps) interest rate cut in May. The market positioning suggests that the USD doesn’t have a lot of room left on the upside, even if PCE inflation data reaffirms the policy held at the next Fed meeting. Hence, a negative print is likely to trigger a bigger market reaction.
Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for EUR/USD:
“The Relative Strength Index (RSI) indicator on the daily chart holds slightly above 50, reflecting a lack of buyer interest. On the downside, 1.0720-1.0700 (200-day Simple Moving Average (SMA), Fibonacci 50% retracement of the October 2024–January 2025 downtrend) aligns as a key support area. In case EUR/USD drops below this region and starts using it as resistance, 1.0600 (Fibonacci 38.2% retracement) and 1.0510 (100-day SMA) could be set as the next bearish targets.
Looking north, resistance levels could be spotted at 1.0820 (Fibonacci 61.8% retracement), 1.0900 (static level, round level) and 1.1000 (Fibonacci 78.6% retracement).”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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