The Fed is not in a good spot.
 

Cyclical and acyclical PCE price data from the San Francisco Fed, chart by Mish
 

Please consider Cyclical and Acyclical Core PCE Inflation by the San Francisco Fed.

The personal consumption expenditures price index (PCEPI) is one measure of U.S. inflation that is considered particularly useful for identifying underlying inflation trends. It tracks the change in prices of a particular basket of goods and services purchased by consumers throughout the economy. The “core” measure of PCEPI excludes food and energy products, whose prices tend to be volatile.

Cyclical components include those categories where prices tend to be more sensitive to overall economic conditions. Acyclical components include those categories that are more sensitive to industry-specific factors.

Cyclical items include housing, rent, food, and gasoline. Acyclical items include healthcare services, financial services, insurance, and clothing.

The key acyclical item I am watching, health care services, has not shown up in the reports, but it is already impacting people.

Health care rates spiked in January, but is not visible in the data yet.

Cyclical and Acyclical PCE Contributions
 

Cyclical and Acyclical PCE Contributions data through November 2025
 

The Fed’s preferred measure of inflation is core PCE which excludes food and energy.

Contributions to Core PCE

• Cyclical Core Components: 1.21 percentage points
• Acyclical Core Components: 1.60 percentage points
• Health Care Services Portion of Acyclical Core: 0.49 percentage points

If I am correct, health care services will jump by 1.5 to 2.0 percentage points in 2026, mostly with the January data.

We will not see this jump in CPI data because of the way the BLS smooths things. The delay with the CPI will be a year or more.

When Will We See the PCE Impact?

• For consumers, right now.
• But health care will not show up in official data until the January PCE report by the BEA. That is currently scheduled for March 13, 2026.

The next PCE report is February 20, 2026. But that is for December 2025 data.

Mid-March, the BEA will tell us what consumers feel right now.

Understanding My Expected Jump

• Health care services is about 17 percent of the PCE
• I expect to see health care services costs to rise by about 10 percent
• The portion paid by employer health care plans may phase in over a few months, but the Medicare and ACA (Obamacare) hikes will be immediate.
• 10 percent of 17 percent is 1.7 percentage point. I expect a jump of 1.5 to 2.0 percentage points.

I am the only one I know harping on this point, so perhaps I am crazy.

But we will not see such a huge spike in the CPI data which comes out first.

Anything Else?

Yes. Utility bills are not in the core CPI. Neither is gasoline.

I believe the price of gasoline has bottomed and will add to month-over-month inflation.

Utility bills are already heading higher. I don’t see an end to that given AI demand for electricity.

So, unless the price of rent drops substantially, non-core PCE inflation may be more stubborn than the Fed thinks.

Weakening Jobs

Undoubtedly, the labor market is cooling fast. It does not show up in continued unemployment claims because people have exhausted their benefits and are no longer counted.

You have to collect benefits to be counted in a claim, not just be unemployed. The unemployment numbers are also skewed because illegal immigrants are not answering phones are participating in surveys.

I discussed all of these ideas in more detail in recent posts.

Related Posts

January 27, 2026: Trump Cheers a Plunge of the US Dollar “I Think It’s Great”

“Look at all the business we are doing,” says Trump.

January 30, 2026: PPI Producer Price Index Inflation Jumps 0.7 Percent Led by Services

Yesterday, Jerome Powell prematurely praised a decline in services inflation.

January 31, 2026: Competing Claims, How Much Labor Market Weakness Is There?

Some see “No Signs of Labor Market Weakness”. Others strongly disagree.

For a look at what health care will do to the PCE price index, please see Expect a Big Divergence This Year Between CPI and PCE Inflation

Rent and Healthcare go different ways in 2026. Plus there are huge timing issues.

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