Deep Dive: What Is Inflation and How Is It Measured — CPI, PCE, and the Numbers That Move Markets
Few economic forces affect everyday life — and financial markets — as directly as inflation. When the price of groceries, rent, and gasoline rises faster than wages, consumers feel the squeeze. When inflation expectations shift, the Federal Reserve adjusts interest rates, bond yields move, and stock valuations recalibrate. Understanding what inflation is, how it is measured, and what drives it is essential for any investor trying to make sense of monetary policy, asset allocation, and long-term purchasing power. As of January 2026, the Consumer Price Index (CPI) stands at 326.6, reflecting a steady climb from 319.7 in February 2025 — an approximate annualized rate of 2.4%. The Federal Reserve's preferred gauge, Core Personal Consumption Expenditures (PCE), rose from 124.6 in January 2025 to 127.9 in December 2025, implying a year-over-year increase of roughly 2.7%. Meanwhile, the Fed has been cutting the federal funds rate from 4.33% in early 2025 down to 3.64% in January 2026, signaling confidence that inflation is cooling — though not yet at the 2% target. This article breaks down the mechanics of inflation, the tools economists use to track it, and what it all means for your portfolio.