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Jun 1, 2025  |  
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Zachary Halaschak, Economics Reporter


NextImg:Inflation dropped to 5% in February, according to key gauge watched by Fed

Inflation fell to a 5% annual rate in February, as measured by the gauge favored by the Federal Reserve.

The decline in the personal consumption expenditures price index reported Friday morning by the Bureau of Economic Analysis shows that inflationary pressures are abating in the face of the Fed’s campaign to slow economywide spending by hiking interest rates.

Nevertheless, inflation is still running much hotter than the central bank’s target and dinging household purchasing power.

Core PCE inflation, a measure of inflation that strips out energy and food prices and is generally less volatile, is clocking in at a 4.5% year-over-year rate.

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The Fed's target for inflation is 2%.

Wednesday’s PCE report comes after the release of the consumer price index, which is even more closely watched. Annual inflation fell to 6% after it had been running at 6.4% the month before. The CPI report marked seven straight months of declines in annual inflation after the rate peaked at a whopping 9.1% in June.

Prices overall grew by 0.4 percentage points between January and February (as opposed to an annual basis), according to the latest CPI reading, a deceleration from December to January.

The new inflation numbers come against the backdrop of ongoing banking turmoil sparked by the collapse of Silicon Valley Bank and its subsequent fallout. The situation has raised fears of contagion and has completely shifted the interest rate picture for the coming year.

Despite the bank failure — the second largest in U.S. history — the Federal Reserve opted to hike interest rates once again in an effort to tame inflation. The central bank raised rates by a quarter percentage point. Some economists had expected the Fed to pause its tightening in order to quell fears of a banking crisis.

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Still, there is now a 58% chance that the Fed will pause rate hiking at its next meeting scheduled for early May, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.

There is also near-unanimity from investors in expecting that by the end of the year, the Fed’s target range for the federal funds rate will be lower than it is today. That is a reversal from before the SVB collapse, when investors were betting on higher rates.