Core Inflation Slows to 2.8% in September 2025

2025-12-06 economy

Washington, Friday, 5 December 2025.
The core PCE price index rose by 2.8% annually, slightly below forecasts, potentially impacting the Federal Reserve’s rate decisions as inflation remains above the 2% target.

Federal Reserve’s Inflation Indicator

The core personal consumption expenditures (PCE) price index, which excludes food and energy prices to provide a clearer picture of underlying inflation trends, increased by 2.8% year-over-year in September 2025. This is a critical measure for the Federal Reserve as it signals inflation trends that influence monetary policy. The September figure, although lower than the anticipated 2.9%, remains above the Fed’s long-term target of 2%[1][2].

Monetary Policy Implications

The slight decline in the core PCE inflation rate from August’s 2.9% to 2.8% in September may impact the Federal Reserve’s upcoming monetary policy decisions. The Fed has already implemented a 25 basis point cut to the federal funds rate, lowering it to a range of 4.00%-4.25%, and there is an 87% likelihood of another rate cut in their next meeting scheduled for December 10, 2025[1][3]. This potential for easing monetary policy comes amid a backdrop of slowing inflation and concerns over labor market weakness[2][4].

Economic Context and Future Expectations

The broader economic context shows that while the core PCE inflation has moderated, the overall economic environment remains challenging. Goods prices have risen monthly by 0.5%, partly due to tariffs, while services prices have increased by 0.2%. Personal income and spending have shown modest growth, with income rising by 0.4% and spending by 0.3% in September 2025[2][5]. These factors contribute to the complex decision-making landscape for the Federal Reserve as it balances its dual mandate of price stability and maximum employment. Goldman Sachs forecasts further rate cuts in 2026, projecting the core PCE inflation rate to fall to 2.3% by the end of that year, suggesting continued easing in monetary policy as inflation pressures subside[6].

Market Reactions and Consumer Sentiment

The market’s response to the inflation data and potential rate cuts by the Fed is crucial. The University of Michigan’s consumer sentiment survey showed an increase to 53.3 in early December 2025, reflecting improved consumer confidence. However, the sentiment remains sensitive to inflation expectations, which have dropped to 4.1% for the one-year view and 3.2% for the five-year outlook, both at their lowest levels since January of the same year[5][6]. This indicates a cautious optimism among consumers, potentially supporting economic stability as the Fed navigates its policy adjustments.

Sources

PCE index core inflation