In order to solve the demodulation distortion caused by light intensity disturbance and modulation depth drift in traditional phase generated carrier (PGC) demodulation algorithm, an improved PGC demodulation algorithm based on fundamental wave mixing and differential self multiplication was adopted. And relevant theoretical analysis and simulation verification were carried out. The results show that the distortion caused by light intensity disturbance can be suppressed, and the demodulation efficiency can be improved at the same timeby using this algorithm. When the light intensity disturbance of 1.5rad~3.5rad was introduced, the signal-to-noise and distortion ratio of nearly 30dB was obtained, which was 15dB higher than the traditional discrete cosine transform (PGC-DCM) algorithm. In addition, the dependence on modulation depth C can be eliminated, and the total harmonic distortion of less than 0.1% and the signal-to-noise ratio of 30dB can be achieved, which was nearly 10dB higher than the traditional algorithm, and the corresponding linearity was up to 99.99%. It provides a new scheme for the demodulation of optical fiber interferometric sensor.