Fed’s Inflation Target Still Out of Reach as PCE Holds at 2.4%

The Fed’s favorite inflation gauge stayed stubbornly above target in January, with the PCE price index rising 0.28% for the month and 2.4% year-over-year — exactly where it was in December. After months of hoping inflation would drift down to the 2% target, we’re getting a clear message: the economy isn’t cooperating.

This isn’t the “last mile” problem many economists predicted. It’s something else entirely. Core goods prices have stopped deflating, services inflation remains sticky around 3.5%, and wage growth is still running too hot for comfort. The pattern looks more like the mid-1990s — when inflation got stuck in a range and stayed there — than the smooth glide path everyone hoped for. What’s particularly telling is that this stall-out is happening despite restrictive monetary policy and a cooling labor market.

The Fed’s credibility is now on the line in a way it hasn’t been since the 1970s. They’ve spent two years telling markets that 2% is the target, not the ceiling. But if inflation settles into a 2.3-2.5% range and the economy keeps growing, do they really want to crash the party? Many professional investors are starting to position for a world where the Fed quietly accepts “good enough” inflation rather than risk a recession chasing the last 40 basis points.

Bottom Line: The Fed may be learning what the European Central Bank discovered years ago — sometimes the economy picks its own inflation rate, and central bankers just have to live with it.

Source: Federal Reserve Economic Data (FRED)

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