Inflation is retreating, based on the latest Consumer Price Index data for January. The CPI report showedinflation at 2.4% in January, the lowest rate of price increases since last May, when tariffs started kicking in.
The decline took Wall Street by surprise, as consensus estimates had been 2.5%. The retreat is welcome, but the Federal Reserve pays more attention to the Personal Consumption Expenditures, or PCE, inflation rate.
CPI by month (past 6 months):
- January 2026: 2.4%
- December 2025: 2.7%
- November 2025: 2.7%
- October 2025: n/a (government shutdown)
- September 2025: 3%
- August 2025: 2.9%
Based on the January CPI data, Goldman Sachs raised its PCE outlook due to oddities in how these inflation measures are calculated.
“We estimate that the core PCE price index rose 0.40% [month over month] in January (vs. our expectation of 0.30% prior to today’s CPI report),” wrote Goldman Sachs economists.
The Bureau of Economic Analysis, or BEA, is scheduled to release its December PCE report on February 20 and January report on March 13 as it plays catch-up following last year’s government shutdown.
Given the Fed’s focus, what the January report says about inflation will impact what happens next to interest rates.
CPI inflation fell to 2.4% in January 2026. Goldman Sachs raised its core PCE inflation forecast for January due to differences in how CPI and PCE are calculated.
TheStreet/Bureau of Labor Statistics
Why PCE inflation won’t mirror CPI
In a research note shared with TheStreet, Goldman Sachs said it expects PCE to show an uptick in inflation during January and an inflation rate higher than CPI.
The bank’s upwardly revised expectation for 0.40% month-over-month growth is due to consumer electronics and IT commodity prices, which are more heavily weighted in PCE than CPI, rising sharply. CPI also benefited from lower used-car prices, but PCE weights used-car prices less than CPI does, further adding pressure.
Related: Top investor betting on bigger Fed interest-rate cuts and gold
Altogether, Goldman Sachs expects headline PCE to be up 2.81% in January, up slightly from 2.8% in November, the last month for which data is updated (again, we get the December data on Feb. 20).
Their economists’ model of core PCE inflation, which excludes volatile oil and food prices, forecasts a 3.05% increase, above the 2.8% rate in November.
Since the Fed’s 2% inflation target for setting interest rate policy is based on core PCE, the increase to 3.05% may surprise investors.
Fed hits sidelines on interest rate cuts despite inflation falling
The Federal Reserve sets monetary policy under a dual mandate to promote low unemployment and stable inflation.
Unfortunately, those goals often run counter to one another: higher rates slow inflation but cause job losses, and vice versa.
Last year, the Fed left rates unchanged until September because while unemployment was rising, so too was inflation. As evidence mounted that unemployment was worsening, Fed Chair Powell pivoted, cutting rates at three consecutive meetings to finish out the year.
At the January meeting, however, Powell retreated again to the sidelines to await more evidence that cuts weren’t causing inflation and that the job market was solidifying.
So far, data doesn’t offer much reason for the Fed to cut rates at its next meeting in March. The unemployment rate fell to 4.3% in January, down from a peak of 4.5% in November. Meanwhile, the January CPI data shows inflation cooling.
On the surface, there’s little reason to act, but if PCE inflation comes in higher it may further tilt the odds toward the Fed holding off on cuts.
Currently, the CME FedWatch tool puts odds of a quarter-point cut at the next FOMC meeting on March 18 below 10%, and the probability of a cut at the April meeting at 26%,
Related: Wall Street strategist sends blunt one-word message on February slump
