Core inflation held above the Federal Reserve’s target before the recent surge in energy prices, according to a key gauge released Thursday that offers the central bank a snapshot of conditions leading into the Iran war.
The core personal consumption expenditures price index, which excludes food and energy, rose a seasonally adjusted 3% in February, the Commerce Department reported. The all-items headline inflation measure increased 2.8%.
Both readings were in line with the Dow Jones consensus. The core annual inflation rate was 0.1 percentage point lower than in January while headline was unchanged.
On a monthly basis, both core and headline prices rose 0.4%, also meeting forecasts.
The Fed uses the PCE price index as its primary yardstick and forecasting tool for inflation. The Fed, which targets 2% inflation, sees core as a better indicator of longer-term trends.
In addition to the inflation readings, the report also showed consumer spending up 0.5% on the month, while personal income fell 0.1%. Economists had expected spending to rise 0.6% with income up 0.4%.
Separately, the Commerce Department reported that economic growth was even slower than previously reported for the fourth quarter of 2025.
Gross domestic product, a measure of all goods and services produced, rose just 0.5% on a seasonally adjusted annualized rate, down from the prior reading of 0.7% and the initial estimate of 1.4%. The full-year growth rate held at 2.1%.
The department said the downward revision came primarily to lower investment than previously indicated. A key metric for demand, called real final sales to private domestic purchasers, was cut to a 1.8% growth rate, down 0.6 percentage point from the first estimate.
“February prices were in line but income was weak and GDP was revised down again. That means stagflation was a little worse than expected even before the Iran war started,” said David Russell, global head of market strategy at TradeStation. “Parallels to the 1970s might be growing as investors assess this fragile ceasefire.”
The inflation data covers the period before the war the U.S. and Israel launched against Iran, so it doesn’t reflect the massive surge in energy prices that took effect during the conflict. Oil prices at one point climbed over $100 a barrel while prices at the pump surged by more than $1 a gallon.
While the data is somewhat dated, it does provide a view of underlying conditions before the war. Fed officials generally look through those types of price surges, viewing them as temporary and not representative of broader trends.
Most Fed officials have been cautious publicly about committing to positions regarding interest rates as they watch events unfold. Minutes from the March Fed meeting, released Wednesday, showed policymakers worried about both sides of their dual mandate for stable prices and low unemployment, though generally inclined to lower rates later this year.
At the same time, markets expect the Fed to stay on hold as the labor market has slowed but has created enough jobs to keep the unemployment rate steady. A Labor Department report Thursday showed a rise in jobless claims to a seasonally adjusted 219,000, up 16,000 from the prior period. The total was higher than the 210,000 estimate but largely in line with recent trends.
Inflation has been above the Fed’s goal for five years, though officials have continued to express confidence that it will stay on a gradual path lower.
A more current look at prices will come Friday when the Bureau of Labor Statistics releases the March reading for the consumer price index. The consensus estimate is that headline prices surged 0.9% for the month, pushing the inflation rate to 3.3%, or nearly a full point higher than February. The core CPI is projected at 0.3% monthly and 2.7% annually.
Correction: Consumer spending rose 0.5% in February and income fell 0.1%. An earlier version had incorrect figures.
