The Personal Consumption Expenditure Price Index (PCE), which is the preferred inflation gauge of the US Federal Reserve Board (Fed), was released yesterday. The PCE showed inflationary pressures in the US were elevated before the conflict in the Middle East began. And now there’s concern it could move even higher in the months to come amid soaring energy prices. This has the potential to alter expectations for the Fed, which was once expected to continue lowering interest rates this year. Meanwhile, a final reading of US economic growth showed the economy grew at a slower pace compared to the previous estimate.

• The annual PCE was 2.8% in February, unchanged from January and matching economists’ expectations, based on a Bloomberg survey. After slowing in early 2025, the PCE has headed higher amid tariffs and relatively strong demand.
• Prices for motor vehicles and parts, clothing and food increased, which was offset by a slowdown in price growth for healthcare and financial services.
• The annual core PCE, which excludes more volatile items such as energy and food, was 3.0% in February, down slightly from 3.1% in January. Annual core PCE has remained at or above 3.0% for three straight months.
• The third and final estimate showed the US economy grew at an annualized pace of 0.5% over the fourth quarter of 2025. This was down from the second estimate of 0.7% annualized growth. The economy struggled with slower consumer spending and a fall in exports.

The conflict in the Middle East has raised the risk of higher inflation in the months to come, maybe longer. Some have argued that military strikes on energy infrastructure will hinder the supply of oil from the area for long after the conflict ends. For now, inflation in the US remains elevated and economic activity slowed, which puts the Fed in a difficult position for its upcoming interest rate decisions.

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