Fed's preferred inflation gauge at 3% ahead of Iran conflict

U.S. inflation data released on April 9, 2026 showed core prices remained at the Federal Reserve’s target level, even as energy prices surged. The report also included weaker-than-previously estimated economic growth and mixed signals from consumer spending and income.

Core and headline inflation: steady near target

In February 2026, the core Personal Consumption Expenditures (PCE) price index—excluding food and energy—rose 3.0% year over year, down 0.1 percentage point from January. Headline PCE inflation increased 2.8% year over year, unchanged from January. Both readings matched Dow Jones’ forecast.

On a month-over-month basis, both the core and headline indices rose 0.4% in February, also in line with expectations.

Fed’s gauge and the 2% target

The Fed uses the PCE index as its main measure for inflation assessment and forecasting, with core inflation viewed as a better indicator of the longer-run trend. The central bank targets inflation at 2%.

Consumer spending and income: mixed

Beyond prices, the report showed consumer spending rose 0.5% in February, while personal income fell 0.1%. Economists had expected spending to rise 0.6% and income to rise 0.4%.

Growth revised lower for Q4 2025

Separately, the U.S. Commerce Department said fourth-quarter 2025 economic growth was weaker than previously estimated. GDP rose 0.5% in Q4 2025, compared with the initial estimate of 1.4%. For the year, growth remained at 2.1%.

Market and policy implications

David Russell, Global Market Strategist at TradeStation, said: “The February price readings were in line with expectations, but weak income and a downward revision to GDP suggest the inflation backdrop has deteriorated more than forecast even before the Iran conflict began.”

The inflation figures reflect a pre-war phase between the U.S.-Israel coalition and Iran, and therefore do not yet incorporate the energy-price shock from the conflict. Oil briefly topped $100 per barrel, and gasoline prices rose by more than $1 per gallon.

Labor market and rate outlook

While the data provide a baseline view of the economy ahead of the conflict, Fed officials have remained cautious about the interest-rate path. The March meeting minutes indicated policymakers were concerned about both inflation and employment, though the tilt remains toward possible rate cuts this year.

Markets currently price in a near-term hold on rates. The labor market shows signs of softening but remains strong enough to keep the unemployment rate steady. Initial unemployment claims were 219,000, up 16,000 from the prior week and modestly above the 210,000 forecast.

Broader inflation context

Inflation has been above the Fed’s target for the past five years, but officials still believe the disinflation trend will continue gradually.