A Bloomberg article comments on something I have been discussing for months. 
The chart is through December 2025. CPI data is already though February while PCE data is only through December 2025.
The divergence will surely widen to the downside when the PCE reports tomorrow.
The Fed is in a very tough spot and will be reluctant to cut rates.
Tame Trouble
Bloomberg reports Tame CPI Still Spells Trouble for Fed’s Favored Inflation Gauge
A key measure of US inflation was tame at the start of the year. But another metric is shaping up to paint a very different picture.
Wednesday’s report on the consumer price index showed core inflation, which excludes food and energy costs, was mild in both January and February — a pleasant surprise as companies tend to raise prices at the turn of the year. Yet economists expect another gauge, one preferred by the Federal Reserve and set for release on Friday, was probably rather strong in both months.
The fact that the personal consumption expenditures price index has been outpacing the CPI is already unusual. Typically it’s been the other way around, as a higher weighting on housing costs in the CPI tends to keep that measure relatively elevated.
Now the wedge appears to be deepening. Should the core PCE rise 3.1% in the year through January as economists expect, it would exceed the annual core CPI by one of the widest margins in decades.
The divergence began before the Iran war, which has sent oil prices sharply higher and renewed risks of a broader acceleration in inflation. That puts the Fed in a tough spot. While policymakers are broadly expected to leave interest rates unchanged next week, a sustained pickup in price pressures would make it difficult for officials to justify resuming rate cuts in coming months to shore up a fragile labor market.
“While CPI data remains benign, PCE inflation data have not strengthened the case for cuts especially with upside risks from oil prices,” Bank of America Corp. economists said in a note.
The PCE price index, a product of the Bureau of Economic Analysis, draws from the CPI for several price categories. In the wake of the latest CPI data, economists were quick to boost their forecast for the February core PCE price index, which is due April 9. Several projected it would rise 0.4% for a second month, with some penciling in a bigger pickup.
The division stems from how each inflation measure weights certain items. CPI, which is produced by the Bureau of Labor Statistics, places a strong emphasis on housing costs. A key metric known as rent of primary residence rose 0.1% from January, the least in five years. It also assigns a higher weight to used-car prices, which have fallen for three straight months.
On the other hand, the PCE price gauge focuses on certain goods costs much more. Economists pointed to products like computer software and jewelry, which both jumped notably in February’s CPI and exert greater influence on PCE inflation. Forecasters at Barclays Plc, Morgan Stanley and Bank of America see PCE core goods prices advancing at least 0.8% in February, 10 times the increase shown in the latest CPI report.
No matter which metric you look at, the war in Iran is expected to push inflation higher in March, which will take into account the latest surge in oil and gasoline prices. Diesel fuel prices have also jumped, which will filter through to higher transportation costs, and the disruption to fertilizer supplies from the region is expected to boost food prices.
“The longer the conflict continues, the greater the risk of it pushing overall inflation upward,” Elizabeth Renter, senior economist at NerdWallet, said in a note. “Next month, we’ll certainly see it in energy price growth, but higher gas prices can cause other categories to grow more expensive too.”
Expected Divergence
The Barclay’s Morgan Stanley, and Bank of America forecast is more along the lines of what I have been predicting.
However, I have been predicting a PCE surge in health care services, not PCE goods. The war in Iran added the concern over goods, now baked in the cake.
Heaven help the Fed if we are both right.
Also, I expected the health care PCE jump primarily in January, with some in February.
I still see no forecasts for this. So perhaps there is some PCE nuance I don’t understand, because health care costs have undoubtedly jumped.
Nonetheless, I have been all over the PCE-CPI divergence, fully expecting this to happen, and it has.
I created the lead chart today to show the divergence and will update the chart tomorrow.
Expect a big blast lower tomorrow, with a widening negative area.
Related Posts
January 21, 2026: Expect a Big Divergence This Year Between CPI and PCE Inflation
Rent and Healthcare go different ways in 2026. Plus there are huge timing issues.
February 2, 2026: The Fed Has Two Huge Problems Starting Now, Acyclical Inflation and Jobs
The Fed is not in a good spot.
March 11, 2026: Year-Over-Year CPI Inflation Will Worsen for at Least Three Months
This is an easy forecast. And it does not even include gasoline prices.
I was definitely spot on regarding the divergence forecast. We find out tomorrow if I over-estimated the health care impact.
Regardless, the Fed is in a tough spot, as predicted, given its strong preference for PCE vs the CPI as a measure of inflation.
Fair point on PCE; but the scary thing now is that Trump’s stupid Iran war may give us a re-run of the 1970s inflation surges. And that is simply no fun for anybody, but especially if you are an ordinary American living paycheck to paycheck.
The Fed is up against bond vigilantes. Interest rates spiked faster off February’s lows faster than they approached them.
So perhaps there is some PCE nuance I don’t understand, because health care costs have undoubtedly jumped
PCE is seasonally adjusted to remove predictable monthly price fluctuations, such as big increases in health care costs every January.
Donald Duck just demanded that Powell reduce interest rates! LOL!
Lost on the Duck is the fact that interest rates have gone up on the 30 year mortgage since the rate cuts started. Interest rates have gone UP on US debt every day since he started his war.
As Trump drives inflation up, destroys our nations credibility and drives up the debt and deficit, interest rates rise because of the increased risk.
Donald must have been playing Epstein Jr. when he was supposed to be taking Econ 101.
health care costs haven’t gone up. It is just that who pays them has changed?
The BoA forecast of .8 is quite likely understated IMO as the effects of this war are just trickling in. We might be looking at a print of 1.0% on a monthly basis for a few months. This will create mayhem in the bond market and continue to drive mortgage rates higher.
Thumbs up or down remains disabled and some of us receive (you cannot vote for your comment) in a red banner for every post we tag. I can only tag Mish…
The coming oil shock will put a swift end to that.
Looks like the war is having an impact on helium supplies. This may drive an increase the cost of chip manufacturing or even a shortage of chips.
QatarEnergy has not restarted helium production at its Ras Laffan complex — one of the largest concentrations of helium production infrastructure globally — nine days after Iranian drone strikes forced the facility offline. The ensuing disruption to supply has sparked concerns for South Korea’s chip industry,
South Korea is among the most exposed countries, which, according to the Korea International Trade Association, imported 64.7% of its helium from Qatar in 2025. The country relies heavily on helium imports to cool silicon wafers during fabrication and is understood to have no viable substitute.
Brent (May) just hit $101
Helium as a coolant is far more ubiquitous than most appreciate, Its use as coolants and in medical imaging equipment is essential. Fortunately the US produces 40% of global supplies and we are unlikely to see actual physical shortages.
As for the price? Yeah baby! Its going up!
Meanwhile, other data ‘no looka so good either’.
To wit, while today’s GDPNow (Atlanta Fed came through a touch better at 2.7% you can go ahead and fade that for March. As if everything about that was not going to head south the BuildIng Permits collapsed in Jan MoM by a huge amount -5.4% va 4.8% consensus – -9.8% worse MoM than consensus. And in the short term housing is a MAJOR contributor to current Q GDPs as the construction spend follows the permits. In this case, MAJOR south.
Q1 in general, ‘she no looka so good – already‘.
Once that headline hits the “efficient markets” will get a whole lot more efficient…Dow 45,xxx next stop
30 days is the max pain threshold for the Straits to be closed, after that it’s financial Armageddon. Dow 20,000 will be more like it.
My man!
With nat gas disruptions and a key resource for generating electricity, I expect electric rates to explode across the board. Don’t forget data centers are still going up all over the place and AI usage is increasing.
I read somewhere Europe is asking people to drive less and work from home to limit fuel consumption. Another hit for commercial real estate and wonder if WFH will increase in US if fuel costs explode over next few weeks.
Seems no matter what Trump does the result is inflation.
Forgot to mention that summer is rapidly approaching, peak driving season, peak A/C season. Needs a musical tribute.
https://www.youtube.com/watch?v=l9ml3nyww80
The US would never encourage employees to work from home. The billionaires would never agree to it.
Well I’ve been working from home for 10+ years and most of the people I know work from home. CRE is as dead as a doornail. High energy costs to keep those big beautiful buildings will be the final nail in the coffin.
They will make lovely pigeon coops, and gradually the edges will soften as they are buried in pigeon poop. Future generations will mine them for phosphates.
Those data centers are not going to be built since the business case no longer makes sense without cheap energy.