Core PCE Holds at 3.1% YoY, Headline at 2.8% in January 2026

The Bureau of Economic Analysis released its January 2026 Personal Income and Outlays report on March 13, delayed from its original February 26 schedule due to the October–November 2025 government shutdown. The headline number: core PCE inflation rose 0.4 percent month-over-month and 3.1 percent year-over-year, remaining stubbornly above the Fed's 2 percent target and matching December's monthly pace. Headline PCE rose 0.3 percent in January, easing slightly from December's 0.4 percent, with a 12-month rate of 2.8 percent. Prior-period headline PCE figures for October through December were revised by less than 0.01 percentage points in either direction — immaterial changes that do not alter the inflation narrative.

Core PCE: Sticky at 3.1% With No Deceleration Signal

The core PCE price index — which strips out food and energy and serves as the Fed's operational inflation guide — rose 0.4 percent in January, matching December's monthly pace. On a year-over-year basis, core PCE stands at 3.1 percent, a full 110 basis points above the 2 percent target. The recent three-month trajectory (November 0.2%, December 0.4%, January 0.4%) shows no meaningful deceleration; if anything, the reacceleration from November's soft print is concerning. Services inflation, which has been the primary driver of core's persistence, contributed 0.3 percentage points to the January PCE change, while goods contributed a negligible amount. Housing and utilities, food services, and other shelter-adjacent categories continued to provide persistent upward pressure within services.

Goods prices, which had been broadly disinflationary through much of 2023 and 2024, contributed only 0.01 percentage points in January — essentially flat. This means the goods disinflation tailwind that helped bring headline PCE down from its 2022 peak has largely exhausted itself. The remaining work of returning core PCE to 2 percent must come from services, where progress has been slow.

Headline vs. Core: Energy Provides a Modest Offset

The 30-basis-point gap between headline PCE (2.8% YoY) and core PCE (3.1% YoY) reflects a modest drag from energy prices. Energy goods and services contributed -0.1 percentage points to the January price change, providing a small offset to services pressure. Food contributed approximately flat to the monthly reading. The divergence between headline and core is relatively narrow by historical standards, suggesting that energy is not meaningfully distorting the underlying inflation signal in either direction — the core reading is an accurate reflection of persistent price pressures.

For context, PCE inflation typically runs roughly 30 basis points below CPI. The January CPI report showed headline CPI running above 3 percent year-over-year, consistent with the PCE read and suggesting no unusual methodological divergence between the two measures this month.

Income Outpaces Spending, Saving Rate Rebounds

Personal income rose 0.4 percent in January, accelerating from December's 0.3 percent pace, driven primarily by compensation gains of $83.7 billion. Wages and salaries accounted for $71.2 billion of that increase, with private sector services-producing industries contributing $48.3 billion. A January cost-of-living adjustment to Social Security benefits added $49.2 billion to transfer receipts, though this was partly offset by a $16.7 billion decline in other government social benefits tied to lower estimated Affordable Care Act enrollments.

Personal consumption expenditures rose 0.4 percent in nominal terms, matching income growth. In real terms, however, PCE increased just 0.1 percent — the price deflator consumed most of the nominal spending gain. Within the nominal $81.1 billion PCE increase:

• Services spending rose $105.7 billion, the primary driver of consumption growth
• Goods spending fell $24.6 billion, a reversal consistent with the soft goods inflation picture

The personal saving rate rose to 4.5 percent in January, up from 4.0 percent in December — a meaningful 0.5 percentage point rebound. This is still well below the pre-pandemic norm of roughly 7–8 percent, but the uptick suggests consumers are not aggressively drawing down savings to fund spending. The January COLA boost to Social Security likely contributed to the saving rate improvement, as transfer income rose faster than spending.

Goods vs. Services: The Disinflation Arithmetic

The goods-services split in January reinforces a pattern that has defined the post-pandemic disinflation: goods prices have normalized while services remain elevated. Goods spending fell in nominal terms, and the goods price contribution to PCE was essentially zero. Services spending, by contrast, surged — and services prices continued to advance at a pace inconsistent with the Fed's target.

This dynamic matters for the disinflation path. The easy part — goods deflation driven by supply chain normalization and lower commodity prices — is largely complete. Getting core PCE from 3.1 percent to 2 percent now requires genuine cooling in services inflation, particularly in housing-related costs and healthcare. Neither category showed signs of meaningful deceleration in January's data.

The next Personal Income and Outlays release, covering February 2026, is scheduled for April 9, 2026. The key data point to watch: whether the 0.4 percent monthly core PCE pace in January was a one-month re-acceleration or the beginning of a renewed uptrend. A second consecutive 0.4 percent core print in February would push the three-month annualized core PCE rate well above 4 percent and materially complicate any near-term policy easing.