The latest reading from a key inflation gauge favored by the Federal Reserve indicates that price pressures remained stubbornly high in December, likely prompting the central bank to maintain its current interest rate levels.

The core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy costs, showed prices rose 3% in December, up from 2.8% in November.

This figure came in 0.2 percentage points higher than economists' forecasts but aligned with expectations voiced by several Federal Reserve officials. Following the January policy meeting, Fed Chair Jerome Powell stated he anticipated core PCE to reach 3%, a view shared by other officials.

This PCE data contrasts with another inflation measure, the Consumer Price Index (CPI) for January, which showed core inflation increasing by 2.5%.

Paul Ashworth, Chief North America Economist at Capital Economics, commented, "Given the Fed's greater focus on the core PCE inflation measure, we believe most Fed officials are unlikely to consider further interest rate cuts in the upcoming policy meetings."

As of December, the inflation rate measured by PCE remained a full percentage point above the Federal Reserve's 2% target.

Chicago Fed President Austan Goolsbee told Yahoo Finance last week that if inflation is at 3% or higher, the current interest rates, after adjusting for inflation, are "not particularly restrictive" on the economy.

He added, "I believe we should be cautious about determining the final level for interest rates until we are confident that inflation is returning to 2%."

On Tuesday, Fed Governor Michael Barr emphasized that he needs to see sustained evidence of inflation cooling before supporting rate cuts and believes rates should remain stable "for some time."

Barr noted that inflation, as measured by the PCE, remains elevated at 3%, partly due to tariffs increasing goods prices. He suggested it is "reasonable" to expect the inflationary impact of tariffs to diminish later this year but also warned there are "numerous reasons to be concerned that inflation could persist at high levels."

"The risk of inflation remaining persistently above the 2% target is significant, which means we must stay vigilant," Barr stated.

On Friday, the U.S. Supreme Court, in a 6-3 ruling, overturned a major part of the former Trump administration's tariff policies, creating uncertainty around the tariff issue.

Minutes from the Fed's January policy meeting, released this week, revealed that most officials cautioned that progress toward the 2% inflation target could be slower and more uneven than expected, with a "considerable" risk of inflation "persistently" exceeding 2%.

The fourth-quarter GDP data released Friday morning also drew significant attention: economic growth was just 1.4%, well below expectations.

The Bureau of Economic Analysis indicated that a partial government shutdown during the quarter may have reduced economic growth by a full percentage point. Government spending fell sharply by 5.1%, with federal spending plummeting 16.6%. Consumer spending also moderated, growing by 2.4%. Exports declined while imports rose, and in GDP calculations, imports subtract from growth. Conversely, business investment increased by 3.7%, with investments in IT equipment, software, and R&D collectively contributing approximately 1 percentage point to GDP growth, highlighting the ongoing influence of the AI boom.

Joe Brusuelas, Chief Economist at RSM, pointed out that although businesses built up inventories early in 2025 to avoid tariffs, data shows this effect had largely dissipated by year-end. He noted that this year, businesses are likely to pass on higher import costs to consumers.

Summarizing the outlook for Fed policy, Ellen Zentner, Chief US Economist at Morgan Stanley, stated, "A cooling economy combined with sticky inflation is not the combination the market was hoping for, but it's the reality presented by this morning's data. The government shutdown was a significant factor in the weaker-than-expected GDP, which should alleviate concerns about a repeat in the first quarter. Coupled with higher-than-anticipated inflation readings, the expectation is for the Fed to stand pat."