US Core Inflation Holds at 3% as GDP Downgrade Fuels Stagflation Concerns

The Commerce Department reported Thursday that the core personal consumption expenditures (PCE) price index, which excludes food and energy, rose 3% annually in February. This reading, along with a headline inflation increase of 2.8%, aligned with Dow Jones consensus forecasts. On a monthly basis, both core and headline prices rose 0.4%. While the inflation figures were stable, the broader economic data revealed growing vulnerabilities. Consumer spending rose 0.5%, missing the 0.6% estimate, while personal income unexpectedly fell by 0.1% against a projected 0.4% increase. These figures suggest a weakening consumer base entering a period of heightened geopolitical instability. Further compounding the bearish outlook, the Commerce Department revised fourth-quarter 2025 economic growth downward to a 0.5% annualized rate, down from the previous 0.7% reading and the initial 1.4% estimate. This revision was driven primarily by lower investment, with real final sales to private domestic purchasers cut to 1.8%. Analysts suggest these trends indicate that stagflationary pressures were mounting even before the outbreak of the war involving the U.S., Israel, and Iran. The conflict has since driven oil prices above $100 per barrel and increased pump prices by over $1 per gallon, though these shocks are not yet reflected in the February PCE data. The Federal Reserve remains in a precarious position. While March meeting minutes indicate a general inclination toward rate cuts later this year, the combination of sticky inflation and a slowing labor market—highlighted by jobless claims rising to 219,000—may force policymakers to remain on hold. Markets now await Friday's March CPI report, with headline inflation expected to surge to 3.3%.