Fed’s Favored Inflation Measure Warm Again. GDI Rescues Q4 Growth

Key Takeaways

• Core PCE rose 0.4% month‑over‑month in February
• Unrounded increase equals 0.367%, marking third consecutive warm reading
• Economists had anticipated higher inflation, confirming persistent price pressures
• Q4 GDP revision improved by GDI data, showing stronger growth
• Fed may keep rates high as inflation stays above target

Pulse Analysis

The core PCE price index remains the Federal Reserve’s go‑to gauge for underlying inflation because it excludes volatile food and energy components. February’s 0.4% month‑over‑month rise, or 0.367% when unrounded, marks the third straight month the metric has hovered above the 0.2%‑0.3% range many analysts consider a soft‑landing signal. This persistence suggests that supply‑side constraints and robust consumer demand are still feeding price growth, keeping the Fed’s 2% inflation goal out of reach.

At the same time, the Bureau of Economic Analysis released revised Gross Domestic Income figures that nudged fourth‑quarter GDP growth higher. The GDI‑based revision lifted annualized growth to roughly 2.6%, a modest but meaningful improvement over the initial estimate. By capturing income‑side activity—wages, corporate profits, and investment earnings—GDI offers a complementary view to the expenditure‑based GDP measure, reinforcing the narrative that the economy’s expansion is more durable than earlier data suggested.

For policymakers, the juxtaposition of stubborn inflation and revived growth creates a delicate balancing act. The Fed is likely to keep its policy rate at the current restrictive level, wary of reigniting price pressures, while also monitoring labor market tightness and consumer spending trends. Markets have responded with cautious optimism, as stronger‑than‑expected growth reduces immediate recession fears, yet the inflation trajectory keeps bond yields elevated. Investors should watch upcoming CPI releases and the Fed’s next policy statement for clues on whether rate hikes will pause or continue.