Fed sees split inflation signals
- Federal Reserve officials are staring at a weird split: core CPI cooled to 2.6% in March, but core PCE — the Fed’s preferred gauge — reaccelerated to 3.2%. - Mortgage rates never really got the memo from rate-cut hopes. Freddie Mac’s 30-year average was still 6.37% on May 7, 2026. - That gap matters because softer consumer inflation and firmer Fed inflation can point to different policy paths — and keep borrowing costs sticky.
Inflation is supposed to be one story. Right now it’s two. The consumer index most people know — CPI — has been looking relatively tame on the core side. But the inflation measure the Fed leans on most — core PCE — has been running hotter. That leaves policymakers with a basic problem: the dashboard is flashing mixed signals just as borrowers are still dealing with mortgage rates above 6%. ### Why are people talking about two inflation gauges? CPI tracks prices paid by urban consumers out of a fixed basket. PCE tracks prices across a broader set of household consumption and lets the mix shift as people substitute toward cheaper options. That sounds technical, but it matters — the two indexes can tell different stories even when they’re both measuring inflation. The Fed targets PCE inflation, not automatically mean the Fed feels done. ### What does the split look like right now? The March numbers made the divergence hard to ignore. Core CPI was up 0.2% on the month and 2.6% from a year earlier. Core PCE, for March, was up 3.2% year over year after 3.0% in February. So the public-facing gauge looked like inflation was gradually settling down, while the Fed’s preferred core gauge looked like it had picked back up. than CPI? A lot of it comes down to weights and categories. Shelter carries more weight in CPI. Health care and some other services matter more in PCE. PCE also captures spending on behalf of households, like employer-paid medical care, which CPI does not handle the same way. So if the sticky price pressure is concentrated in the kinds of services PCE emphasizes, core PCE can look firmer even while core CPI behaves. ### Is this just one noisy month? Maybe not. Cleveland Fed nowcasts as of May 7 point to core CPI around 2.56% year over year for April and core PCE around 3.28%. For May, the nowcast still shows core CPI near 2.61% and core PCE near 3.32%. Nowcasts are not official data, but they suggest the split has not obviously closed yet. More about PCE? Basically, PCE is closer to the Fed’s formal 2% target framework. It covers a broader slice of spending and updates weights more dynamically. Fed officials’ March projections were built around PCE and core PCE, not CPI, which tells you what sits at the center of policy discussions. If core PCE stays stuck above 3%, the case for easier policy gets weaker even if CPI headlines look friendlier. ### Then
