Fed's Preferred Inflation Gauge Holds at 3%
The Federal Reserve’s preferred inflation gauge registered at 3%, a figure in line with analyst expectations. While the data suggests the worst of recent price surges may be over, the persistent level makes it unlikely the Fed will rush into interest rate cuts. The stability of the gauge indicates that tighter credit conditions and a focus on efficient capital allocation will likely continue for businesses in the near term.
- The Fed's preferred inflation gauge is the Personal Consumption Expenditures (PCE) price index, which it favors over the more commonly cited Consumer Price Index (CPI). The PCE index is considered more comprehensive because it tracks how consumers adjust their spending in response to price changes, such as substituting chicken for beef when prices rise. - To combat inflation, the Federal Reserve aggressively raised its benchmark federal funds rate between March 2022 and July 2023, bringing it to a 23-year high. This key interest rate, which influences borrowing costs across the economy, was lifted from near-zero to a range of 5.25-5.50%. - Economists and the Fed pay close attention to the "core" PCE index, which excludes volatile food and energy prices to get a clearer picture of the underlying inflation trend. - The current 3% inflation level is substantially lower than the recent peak. For comparison, PCE inflation reached as high as 6.6% in September 2022 before the full effect of the Fed's rate hikes took hold. - Projections from the Congressional Budget Office forecast that PCE inflation will slow to 2.7% in 2026 and eventually return to the Federal Reserve's long-term target of 2% in 2030. - For San Francisco businesses, the impact of inflation is multifaceted, leading to higher costs for goods and labor, which in turn pressures them to raise prices. For example, one local restaurant owner cited that a sack of onions that cost $9 before the pandemic now runs $80. - The economic recovery in San Francisco remains uneven. While neighborhoods like Mission Bay have seen a 31% surge in sales tax revenue, citywide revenue in the first half of 2025 was down 27% compared to the same period in 2019, adjusted for inflation. The Financial District and South of Market have experienced the steepest declines, down 39% and 41% respectively.
