The US Core Personal Consumption Expenditures (PCE) Price Index YoY remained at 2.90% in September 2025, unchanged from August and in line with market expectations. This metric, favored by the Federal Reserve for its inflation targeting, excludes volatile food and energy prices, providing a clearer view of underlying inflation trends. The steady reading follows a gradual rise from 2.50% in May 2025, reflecting persistent price pressures in key service sectors.

Drivers this month

• Shelter costs contributed approximately 0.18 percentage points to the headline figure, maintaining upward pressure.
• Services excluding shelter added 0.12 percentage points, reflecting wage growth and demand resilience.
• Used car prices exerted a minor downward influence of -0.05 percentage points, consistent with easing supply constraints.

Policy pulse

The 2.90% reading remains above the Fed’s 2% inflation target, suggesting that while inflation is moderating from peaks above 4% in 2022, price pressures are still elevated. The Federal Reserve’s recent rate hikes and forward guidance aim to bring inflation closer to target by late 2026.

Market lens

In the first hour after the release, the US dollar index (DXY) appreciated modestly by 0.15%, while 2-year Treasury yields rose 5 basis points, signaling market confidence in the Fed’s hawkish stance. Breakeven inflation rates for 5-year TIPS remained stable near 2.30%, reflecting anchored inflation expectations.

Core macroeconomic indicators provide context for the Core PCE reading. US GDP growth for Q2 2025 was revised upward to 2.10% annualized, supported by consumer spending and business investment. Unemployment held steady at 3.70%, near historic lows, sustaining wage growth and consumer demand. The Consumer Price Index (CPI) YoY for August 2025 was 3.20%, higher than Core PCE, reflecting energy and food price volatility.

Monetary Policy & Financial Conditions

The Federal Reserve’s policy rate currently stands at 5.25%, unchanged since July 2025. Financial conditions have tightened moderately, with credit spreads widening slightly amid geopolitical uncertainties. The Fed’s balance sheet reduction continues at a measured pace, supporting gradual normalization.

Fiscal Policy & Government Budget

Fiscal policy remains moderately expansionary, with the US government running a deficit of approximately 5.10% of GDP in FY 2025. Infrastructure spending and social programs provide demand support, potentially sustaining inflationary pressures in the medium term.

Drivers this month

• Shelter inflation rose 0.30% MoM, contributing 0.18 pp to the YoY rate.
• Services excluding shelter increased 0.20% MoM, adding 0.12 pp.
• Goods prices were flat, with used cars and trucks prices declining slightly.

Market lens

Immediate reaction: EUR/USD dipped 0.20% following the print, reflecting a stronger dollar amid steady inflation data. US equity futures showed minor declines, while bond yields edged higher, consistent with expectations of sustained Fed tightening.

Looking ahead, inflation dynamics will hinge on several factors. The Fed’s ongoing rate policy, fiscal stimulus, and external shocks will shape the trajectory of Core PCE inflation. We outline three scenarios:

Bullish scenario (30% probability)

• Inflation moderates to 2.20% by mid-2026 as supply chains normalize and wage growth slows.
• Fed pauses rate hikes and signals easing in late 2026, supporting growth and market stability.

Base scenario (50% probability)

• Core PCE remains near 2.80-3.00% through 2025-end, gradually declining to 2.50% by Q3 2026.
• Fed maintains current rates with cautious communication, balancing inflation risks and growth.

Bearish scenario (20% probability)

• Inflation accelerates above 3.20% due to wage pressures and renewed supply shocks.
• Fed resumes aggressive tightening, risking recession and financial market volatility.

External Shocks & Geopolitical Risks

Ongoing geopolitical tensions, particularly in energy markets, could disrupt supply chains and push prices higher. Conversely, easing trade frictions or breakthroughs in technology could alleviate inflationary pressures.

The September 2025 Core PCE Price Index YoY reading of 2.90% underscores the persistence of inflation above the Federal Reserve’s target. While the data suggests a plateau rather than acceleration, inflation remains a key risk for monetary policy and financial markets. The interplay of fiscal stimulus, labor market tightness, and external shocks will determine whether inflation recedes smoothly or requires further policy tightening.

Structural & Long-Run Trends

Long-term inflation expectations remain anchored near 2%, supported by credible central bank policies. However, structural changes such as labor market shifts, demographic trends, and technological innovation will influence inflation dynamics over the next decade.

Financial Markets & Sentiment

Market sentiment is cautiously optimistic, with investors pricing in a gradual return to price stability. The US dollar’s strength and stable breakeven inflation rates reflect confidence in the Fed’s approach, though volatility could rise if inflation deviates from expectations.

Key Markets Likely to React to Core PCE Price Index YoY

The Core PCE Price Index YoY is a critical gauge of inflation that influences monetary policy and market expectations. Key markets that historically track this indicator include US Treasury yields, the US dollar, and inflation-sensitive sectors. Movements in these markets often reflect shifts in inflation outlook and Fed policy adjustments.

• SPX: The S&P 500 index reacts to inflation data through sector rotation and interest rate expectations.
• USDEUR: The US dollar to euro pair moves with Fed policy expectations tied to inflation trends.
• USDJPY: Sensitive to risk sentiment and interest rate differentials influenced by inflation.
• BTCUSD: Bitcoin often reacts to inflation fears and monetary policy shifts.
• TLT: Long-term Treasury ETF, sensitive to inflation expectations and bond yields.

Insight: Core PCE Inflation vs. SPX Since 2020

Since 2020, the Core PCE Price Index YoY and the S&P 500 (SPX) have shown an inverse correlation during periods of rising inflation. For example, inflation spikes in 2021-22 coincided with market volatility and corrections. Conversely, periods of inflation moderation have supported equity rallies. This dynamic underscores the importance of inflation control for sustained equity market growth.

FAQs

What is the Core PCE Price Index YoY?

The Core PCE Price Index YoY measures the annual change in prices paid by consumers for goods and services, excluding food and energy, providing a stable inflation gauge.

How does the Core PCE affect monetary policy?

The Federal Reserve uses the Core PCE as its preferred inflation measure to guide interest rate decisions and maintain price stability.

Why is the Core PCE important for investors?

Core PCE trends influence bond yields, currency values, and equity market sentiment, affecting investment strategies and risk assessments.

Takeaway: The steady 2.90% Core PCE inflation reading signals persistent price pressures, requiring careful Fed monitoring amid evolving economic and geopolitical risks.

This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.