Core Inflation Stuck at 3%, Leaving Fed No Room to Cut Rates

Core inflation remains stuck at 3%, leaving the Federal Reserve no room to cut interest rates. The Personal Consumption Expenditures Index, the Fed’s preferred inflation gauge, showed prices rising 2.8% in February, while the core measure — excluding food and energy — held steady at 3%. That’s unchanged for three months. On a 3-month annualized basis, core inflation runs at 3.7%, well above the central bank’s 2% target. The Federal Reserve is holding rates steady, waiting for clear evidence that inflation is truly cooling.

Goods inflation jumped 0.84% in February, a sign that tariffs are still feeding through the economy. Analysts see this as lagged pass-through, reinforcing the Fed’s caution. Even as services inflation showed improvement — offering some relief that price pressures aren’t broadening — central bankers remain wary.

Chicago Fed President Austan Goolsbee warned that an oil shock is now compounding inflation just as tariff effects work their way into prices. That creates a stagflationary risk, with prices rising even as growth slows. The March policy meeting minutes confirmed that officials expect higher oil prices to delay the return of inflation to 2%. A prolonged conflict in the Middle East would only deepen that problem, pushing energy costs higher and increasing the likelihood that those costs spill into core inflation.

The vast majority of Fed participants now believe inflation could remain persistently above target. With no sign that tariff-driven goods inflation is rolling over, and new risks from oil, the central bank has no path to rate cuts.