Mexican watermelon is on display on the shelves of the Target Store in Novato, California on March 5th, 2025.
Justin Sullivan | Getty Images
On the surface, February inflation data released this week brought some encouraging news. But beneath it was signs that the Federal Reserve would likely be withheld in terms of interest rates.
Both consumer and producer price indexes were lower than expected, but that is not necessarily reflected in the key measures the Fed uses to measure inflation.
According to multiple Wall Street Economists, policymakers rarely take much comfort in these numbers, as some Byzantine mathematics and mathematics and trends in several important fields are several key areas.
“In short, advances in inflation began on the wrong foot in 2025,” Bank of America economist Stephen Juneau said in a memo. “The PCE inflation forecast strengthens our view that it is unlikely that enough inflation will fall sufficiently to the Fed to cut this year, especially given policy changes that promote inflation. We maintain that policy rates will remain pending until the end of the year unless activity data actually weakens.”
For now, at least, the market agrees. According to CME Group’s calculations, traders have not been cut nearly at the Federal Open Market Committee meeting next week, and have not allocated a chance of about a quarter of reduction in May.
The Fed is paying attention to the Gauge Bureaus of the two Bureaus of Labor Statistics, but believes that the last word on inflation is the Commerce Department’s Personal Consumption Expense Price Index.
Central bank officials believe PCE readings, particularly the core that excludes prices for food and energy — look at price trends more broadly. The index also reflects more closely the prices of individual products and services, as well as what consumers are purchasing. If the consumer is replacing beef chicken, it will be more shown in PCE rather than CPI or PPI.
Most economists believe the latest PCE reading, scheduled for release later this month, shows a year-over-year inflation rate that shows it is stable at 2.6% or perhaps even ticking Notch.
Specifically, Thursday’s PPI report, which measures wholesale costs and considers a measure of pipeline inflation, “confirms the fear that benign February inflation prints will be mapped to the expected inflation printing on the Fed’s preferred PCE inflation gauge,” writes Krishnaguha, head of global policy and central bank strategy.
“Under steady decline until the early days (second quarter), PCE inflation appears to be bumpy and choppy,” he added.
According to Sam Tombs, chief economist at Pantheon Macroeconomics, the areas that earn feeds from PPIs and promote PCEs include higher hospital care prices, including insurance prices and air transport.
“Outturns will almost certainly win the Fed,” Combs wrote.
Combs predicts that Core PCE Reading in February will show an inflation rate of 2.8%, up 0.2 percentage points from January. It’s lined up with others on the streets as Bank of America and Citigroup consider their core inflation rate at 2.7%. Either way, it’s moving in the wrong direction. The Consumer Price Index showed that the core inflation rate was 3.1% since April 2021.
But there may still be some good news.
As much as expectations for bounces from February, many predictors see inflation that will pull back beyond that, even if it has an impact from tariffs.
Citi believes March will see a “more advantageous” read, and the company is projecting a Fed’s call to resume interest rate cuts in May. Market prices now show a much higher chance of a June cut.
