Why the Fed Tracks Core PCE as Inflation Lingers Above 2%

The Federal Open Market Committee left the target federal funds rate at 3.50%–3.75% at its most recent meeting, the third meeting of the year. Markets had priced in no change, and the CME FedWatch tool showed about a 99% probability the Fed will hold rates again next month.

The Committee’s post-meeting statement noted inflation remains ‘elevated’ and pointed to recent increases in global energy prices. The statement said the Committee remains ‘strongly committed to returning inflation to its 2% objective.’

Policymakers use the Personal Consumption Expenditures (PCE) Price Index as their primary inflation gauge and focus on core PCE, which excludes food and energy. Core measures remove items with large, short-lived price swings so officials can track underlying inflation trends that monetary policy is meant to influence.

The PCE and the Consumer Price Index (CPI) are constructed differently. The PCE, compiled by the Bureau of Economic Analysis, reflects a broader set of consumer spending and uses a chain-weighted formula that captures substitution between goods when relative prices change. The CPI, produced by the Bureau of Labor Statistics, measures prices faced by households using a more fixed basket of goods and services.

Core PCE peaked at 5.57% in February 2022 and core CPI peaked at 6.63% in September 2022. Over the long run, core CPI has been higher about 80% of the time and has averaged roughly 47 basis points above core PCE. In November 2025 core PCE moved above core CPI; the most recent gap shows core PCE about 54 basis points higher. Measured from 1960 through April 2026, cumulative growth in core CPI was about 1,001% while core PCE rose about 719%.

Headline inflation includes food and energy and often tracks costs households see directly. The Fed’s emphasis on core PCE reflects that measure’s lower volatility, which officials use when setting interest-rate policy.