US Core PCE Inflation Breadth Remains Elevated but Is Not Near the Pandemic Peak

Overview

This report examines whether US inflation is broadening from isolated price increases caused by supply shocks into more widespread high inflation. Goldman Sachs agrees with the Federal Reserve’s view that individual price shocks must be prevented from “broadening,” and believes that, with the economy and labor market not overheated, the main upside risk is that continued supply shocks lead businesses to treat unusually large price increases as normal.

Core views

Goldman Sachs’s core judgment is that the breadth of high US inflation remains above the 1990–2019 average, particularly when measured using core PCE weights, but remains far from the pandemic inflation peak in 2022. The weighted share of categories above 3% is significantly elevated, while the unweighted share is only modestly above normal; the share above 4% is moderately elevated under both measures. Looking ahead to the fourth quarter, large housing-related categories are expected to continue cooling, so weighted inflation breadth should decline significantly.

Analysis framework

The report uses PCE prices rather than CPI because PCE is the Federal Reserve’s preferred inflation measure, and a diffusion index based on CPI would be overly influenced by the large weight assigned to owners’ equivalent rent. Goldman Sachs observes six-month annualized price changes across core PCE categories, calculates the weighted and unweighted shares of categories with elevated inflation, and compares them with the average during the low-inflation period from 1990–2019, when core PCE inflation was approximately 2%.

Methodology notes

• Macroeconomic Inflation AnalysisCore PCE Inflation-Breadth Diffusion Indicator

  Measures whether high inflation is broadening by calculating the share of core PCE categories with six-month annualized inflation above a threshold.

  The method calculates both weighted and unweighted shares, using the 1990–2019 average as a low-inflation reference and the 2022 pandemic inflation peak as a high reference point to assess whether current high inflation has become widespread.

• Data AdjustmentsTariff and Housing Data Adjustments

  Excludes the estimated impact of 2025–2026 tariffs on category prices and adjusts for the issue of April housing inflation being counted for one additional month due to the government shutdown.

  These adjustments are intended to identify inflation breadth more accurately rather than misclassifying one-off or special factors as broad-based inflation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US Interest Rates

  Inflation breadth affects Federal Reserve policy expectations and interest-rate pricing.

  Strengths

  If weighted inflation breadth declines as expected, it could ease upward pressure on long-term and policy interest rates.

  Weaknesses

  Weighted inflation breadth remains well above its pre-pandemic average, indicating that interest-rate markets still need to price the risk of persistent inflation.

  Comparison

  Current inflation breadth is above the 1990–2019 average but below the 2022 pandemic peak.

  Risks

  Persistent supply shocks, higher oil prices, or slower-than-expected cooling in housing could delay expectations for lower interest rates.

• US Dollar

  Inflation and Federal Reserve policy expectations affect the dollar’s interest-rate differential support.

  Strengths

  If the risk of inflation broadening remains contained, the dollar’s policy-tightening premium may not rise further.

  Weaknesses

  If high inflation spreads to more categories, renewed hawkish Federal Reserve expectations could support the dollar.

  Comparison

  The report does not provide a direct foreign-exchange trading recommendation and offers policy context only from a macroeconomic inflation perspective.

  Risks

  Inflation data exceeding expectations, an oil-price shock, or renewed market repricing of the Federal Reserve’s policy path.

Key data

• Weighted share of core PCE categories above 3%58%The 1990–2019 average was 37%.
• Unweighted share of core PCE categories above 3%41%The 1990–2019 average was 35%.
• Weighted inflation-breadth scale above 3%6/100 represents the 1990–2019 average, while 10 represents the average at the 2022 pandemic inflation peak.
• Unweighted inflation-breadth scale above 3%2/10This indicates that diffusion at the category-count level is relatively moderate.
• Inflation-breadth scale above 4%2/10The measure is 2/10 under both weighted and unweighted approaches.
• Major categories above 6%Video and audio, financial services, medical care services, airfares and other transportation servicesTheir approximate core PCE weights are 3.9%, 3.0%, 2.9%, and 2.5%, respectively.

Impact & implications

For market and policy assessment, the report signals that US inflation still carries some risk of broadening but does not yet show the broad loss of control seen at the pandemic peak. If housing inflation continues to decline as expected, the Federal Reserve’s inflation-breadth pressures could ease in the fourth quarter; conversely, if supply shocks continue to push up prices across more categories, inflation expectations and the policy-rate path could face upside risks.

Risks

• Price increases caused by supply shocks could lead businesses to treat larger price hikes as normal.
• The breadth of high inflation remains above the 1990–2019 average, particularly on a weighted basis.
• The impact of higher oil prices on some transportation-service prices has not been excluded and could continue to push up certain categories.
• If rents and owners’ equivalent rent do not decline as indicated by leading indicators, the fall in weighted inflation breadth could be delayed.

What to watch

• June and subsequent core PCE inflation data.
• The weighted and unweighted shares of core PCE categories above the 3%, 4%, and 6% thresholds.
• Whether rents and owners’ equivalent rent continue to decline toward leading rent indicators.
• The impact of tariffs, higher oil prices, and government data anomalies on category prices.
• Changes in Federal Reserve language regarding inflation broadening and inflation expectations.