A divergence has emerged among key U.S. inflation indicators in early 2026. While Wednesday's Consumer Price Index (CPI) report revealed subdued core inflation readings for both January and February—a positive surprise given typical early-year price hikes by businesses—economists anticipate a contrasting picture from the Federal Reserve's preferred gauge. The core Personal Consumption Expenditures (PCE) price index, scheduled for release on Friday, is projected to show stronger performance for the same period.

It is unusual for the PCE index to outpace CPI growth. Typically, the opposite occurs because the CPI assigns a heavier weight to housing costs, which often keeps it elevated. Currently, this gap appears to be widening. If the core PCE inflation rises 3.1% year-over-year through January, as economists expect, it would mark one of the largest margins above core CPI in decades.

This divergence predates the Iran conflict, which has triggered a surge in oil prices and reignited risks of broadening inflation. This poses a challenge for the Federal Reserve. Although policymakers are widely expected to hold interest rates steady next week, persistent price pressures could complicate plans to resume rate cuts in coming months to support a fragile labor market.

Bank of America economists noted, "While CPI data remains moderate, PCE inflation figures do not strengthen the case for rate cuts, particularly amid rising oil price risks."

The PCE index, compiled by the Bureau of Economic Analysis, draws data from the CPI but covers different spending categories. Following the latest CPI release, economists promptly raised their forecasts for February's core PCE reading, due April 9. Some predict a second consecutive monthly increase of 0.4%, with a few anticipating even stronger gains.

The discrepancy stems from differing weightings across inflation measures. The CPI, produced by the Bureau of Labor Statistics, emphasizes housing costs. A key metric, owners' equivalent rent, rose just 0.1% in January, its smallest increase in five years. The CPI also assigns greater importance to used car prices, which have declined for three straight months.

In contrast, the PCE index captures significant price increases in specific goods. Economists highlight that items like computer software and jewelry showed notable gains in February's CPI and exert a larger influence on PCE inflation. Forecasters from Barclays PLC, Morgan Stanley, and Bank of America project core goods prices within the PCE index rose at least 0.8% in February—ten times the increase seen in the latest CPI report.

Regardless of the metric, the Iran conflict is expected to boost U.S. inflation in March, reflecting recent spikes in oil and gasoline prices. Diesel prices have also risen sharply, which will translate into higher transportation costs, while disruptions to fertilizer supplies from the region are likely to push food prices upward.

NerdWallet senior economist Elizabeth Renter stated, "The longer the conflict persists, the greater the risk of boosting overall inflation. Next month, we will certainly see energy prices rise, but higher gasoline costs will also lead to increases in other categories."