Consumer prices increased moderately in January, the Federal Reserve’s preferred inflation gauge showed on Friday. Economists worry prices will climb even higher in the next weeks.
The Personal Consumption Expenditures price index, as the gauge is called, notched a 0.3 percent monthly increase in the first month of 2026. Compared with the same time last year, prices were up 2.8 percent. The “core” inflation reading, which strips out more volatile food and energy prices, came in at 0.4 percent on a monthly basis, and 3.1 percent on an annual basis. That is a full percentage point above the Fed’s 2 percent target.
Data revisions also showed that economic growth was slower at the end of 2025 than initially estimated. Gross domestic product, the benchmark measure of economic growth, was revised down to a 0.7 percent annual pace for the last three months of the year.
A snapshot taken just before the shock to oil prices from the war with Iran, the price data offer a worrisome setup for inflation going forward.
After peaking over 9 percent on an annual basis in 2022, inflation cooled off by 2024, gliding just above the Fed’s 2 percent target. Since 2025, though, the inflation picture has worsened. Goods inflation, which had been slowing for years, has swung back up in various categories since President Trump announced tariffs last spring. Some of those tariffs have been struck down by the Supreme Court. Others, though, remain in place, and have led businesses to toggle between absorbing the increased cost of imports and passing along those new costs to consumers.
According to analysts at Employ America, a research group that tracks employment and price data, tariffs are an “obvious culprit” of some excess inflation, especially in apparel and furniture. But they note that shortages stemming from the artificial intelligence boom are also playing a part in price rises. Computer accessories and tech equipment, for instance, are experiencing abnormal cost increases compared with averages in recent years.
Inflation in health care services, a major part of the economy, continues to play a role in hotter prices too. This Personal Consumption Expenditures index released Friday has been running slightly hotter than the more commonly cited Consumer Price Index. That divergence is largely the result of the fact that C.P.I. weighs housing inflation more heavily. And the rate of increases in rent has slowed as the overall economy has slowed.
Regardless, both inflation measures are likely to tilt higher next month once the inflationary impacts of higher oil prices are felt. The price of West Texas Intermediate crude, the U.S. benchmark, has risen to around $90 a barrel from $60 levels in February. Airfares, gasoline prices and restaurant costs are all expected to be affected.
Despite all of the sobering news weighing on consumer sentiment and financial markets, consumption levels in January indicate that the economy is growing. Consumer spending, a key driver of the services-based U.S. economy, has held up but was flat on an inflation-adjusted basis.
The new data, and the new war, complicate decision making for Federal Reserve leaders who have found themselves torn between the bank’s dual mandates of price stability and maximum employment.
The economy added just 116,000 jobs in all of 2025, and employers have cut jobs in two of the past three months, according to the Bureau of Labor Statistics. And yet, inflation has been above the central bank’s 2 percent target for five years now.
Investors worried about the purchasing power of their dollars want the Fed to hold steady and not reduce interest rates, even as the oil shock threatens growth. They point to the example of the 1970s, when a Fed facing an oil shock caused by geopolitical tremors overseas decided to ease interest rates. The “stagflation” of rising prices and stagnant growth conditions persisted.
The consensus in central banking today is that this move was a mistake, and that the Fed then ought to calibrate interest rates to fend off inflationary pressures.
Analysts and traders that closely follow the Fed acknowledge the balancing act is treacherous. In the lead up to the global financial crisis of the 2000s, energy prices soared. Near-term inflation rose substantially, ticking above 5 percent on an annual basis.
At the same time, central banks across the globe in 2008 were still worried about rate cuts fueling further inflation and financial market speculation. That year, the price of oil peaked at over $130 before falling to $41 by December, as the global economy entered a recession.
Talmon Joseph Smith is a Times economics reporter, based in New York.
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