U.S. Economic Snapshot

Looking at the annualized monthly CPI inflation rate, March looks like an outlier: April inflation is up (again). The overall CPI rose from -0.6% in March to 2.68% in April; excluding the volatile food and energy components, core CPI inflation popped up from 0.68% to 2.88%. Nonetheless, the annual inflation rate fell slightly from 2.41% to 2.33% (overall CPI) or from 2.81% to 2.78% (core CPI). The decline in the annual inflation rate reflects the observaton that the monthly inflation rate for April 2024 exceeded that for April 2025.

Our trend measures of CPI inflation also rose: from 2.21% in March to 2.37% in April for overall CPI inflation, and from 2.55% to 2.66% for core CPI inflation. Regular readers will remember that our trend measure of inflation sees through the blips in the monthly inflation rate while also being more responsive to underlying changes in trend than the annual inflation rate.

We pay attention to CPI inflation because it tends to move together with PCE inflation (the Fed’s preferred measure) which will be released in a couple of weeks. The tick up in April’s CPI inflation suggests that we may see a similar increase in April’s PCE inflation. The prospects for the FOMC cutting interest rates remains dim.

April saw solid job gains of 177 thousand according to today’s Employment Report from the BLS. While employment gains in April were lower than the revised figures for March (185 thousand, revised down from 228 thousand), April’s job gains easily exceeded those over the past 12 months (152 thousand).

While the government sector added 10 thousand jobs in April, the federal government shed 9 thousand jobs. In fact, in each of the past 3 months, federal govenment employment has fallen, presumably reflecting the efforts of DOGE to reduce the size of the federal government workforce. However, as noted in the BLS’s press release, employees on paid leave or receiving severance pay are considered employed in the establishment survey.

The household survey portion of the employment report showed a small uptick in the unemployment rate, from 4.15% in March to 4.19% in Aprl. The unemployment rate has varied in a fairly narrow band, between 4 and 4.2% since the middle of last year.

In Aprl, average hourly earnings rose 6 cents, to $36.06. However, workers ought to care about the goods and services that their wages garner — that is, their real wage. The figure below shows that real average hourly earnings have been increasing over the past couple of years. How much the real wage has gone up depends on the measure of prices, with flatter real wage growth when measured using either the CPI or core CPI, and somewhat faster real wage growth using the PCE or core PCE deflator.

Many economists are predicting a severe recession if Trump carries through with his planned tariffs. Thus far, we aren’t seeing these effects in the labor market. Nor does the Chauvet and Piger measure show any threat.

by paul gomme and peter rupert

In its advance estimate, the BEA announced that Q1 GDP declined 0.3% on an annualized basis. Total output (GDP) is the sum of consumption, investment, government spending and net exports (exports – imports). Given the turmoil from Washington, DC, investment and imports saw outsized gains, 21.9% and 41.3%, respectively. But one needs to be careful here in interpreting these numbers. Imports do not add or subtract from GDP. Those who claim that imports are a drag on GDP are simply wrong. When someone imports a $1,000 TV (imports go up but enter the GDP calculation with a negative sign), someone buys that TV so consumption goes up by that same amount. It seems that most journalists reporting on this make the mistake that it was, in fact, imports driving down GDP. Here is a nice explanation that goes deeper.

Consumption grew 1.8% and government consumption fell 1.4%.

A different way to view the GDP numbers is in terms of contributions of the major components to output growth (that is, weighting the growth rates of the various components by their shares of GDP). Recall that output growth was -0.28% (annualized). Investment contributed 4.01 percentage points to output growth while consumption added 1.24 points. Exports chipped in a meager 0.2 percentage points. Negative contributions were recorded by government spending (-0.25 percentage points) and -6.48 points due to the surge in imports.

The BEA also released the Personal Income and Outlays report that showed an annualized decline of 0.53% in the personal consumption expenditures price index in March (down from 5.47% in February) while our preferred trend measure came in at 2.46% (a drop from February’s 3.96%). On a year-over-year basis, PCE inflation slipped from 2.69% to 2.29%. The core PCE inflation remained positive at 0.33%, a plunge from 6.14% in the previous month); our trend measure dropped from 4.03% to 2.80%; and the year-over-year rate dipped from 2.96% to 2.65%. Interestingly, these declines in PCE inflation were largely foreshadowed by similar declines in CPI inflation (released two weeks ago).

The large spike in imports could plausibly be caused by buying before the tariffs kick in and so would likely be transitory. The same might be said for investment as the largest component was equipment investment, rising 22.5% on an annualized basis. With the large effect from imports driving the decline in GDP and the fact that inflation remains above the Fed’s target presents a case for the Fed to keep the fed funds rate at its current level.

by paul gomme and peter rupert

The BLS announced that the CPI fell 0.60% on an annualized basis in March, down from 2.62% in February. The year-over-year inflation fell from 2.81% (February) to 2.40% (March) while our trend measure dropped from 3.62% to 2.21%.

Inflation as measured by core CPI inflation (excluding food and energy) similarly fell. The annualized month-over-month rate tumbled from 3.49% to 2.55% while the year-over-year rate dipped from 3.14% to 2.81%. Our trend measure of core CPI inflation dropped even more, from 3.49% to 2.55%.

What does the CPI portend for the PCE deflator (to be released in a couple of weeks) and so monetary policy? Frankly, it’s hard to tell. While CPI and PCE inflation move together when looking at long periods of time, at much shorter horizons there’s a much looser link. For example, February’s CPI inflation fell relative to January, yet PCE inflation rose.

The good news for the policy outlook is that, at the time we are writing, President Trump has put a 90 day pause on his plan to raise tariffs on most countries. The one exception is China: both countries have raised their bilateral tariffs to prohibitively high values.

by paul gomme and peter rupert

The BLS announced that payroll employment rose 228,000 in March after January and February’s lackluster performance. The private sector added the bulk of the jobs, 209,000, with the government sector adding 19,000. The federal government, however, lost 4,000 jobs in March having already lost 11,000 in February.

The manufacturing sector continues to struggle, adding only 1,000 jobs in March and only 4,000 jobs over the past three months. The service sector, on the other hand, grew 197,000.

Average weekly hours remained at 34.2 and average hourly earnings rose from $35.91 to $36.00.

The household survey showed an employment increase of 201,000. The number of unemployed persons increased by 31,000. The labor force participation rate increased from 62.4 to 62.5. The unemployment rate ticked up very slightly, from 4.14% to 4.15%. Note that the unemployment rate as well as those marginally attached are still near their all time lows.

The Jobs Openings and Labor Turnover Survey (JOLTS) was released on April 1. Overall, there was very little change in any of the metrics: openings, hires and separations. As of March, there are still slightly more job openings that unemployed individuals.

On April 2, 2025, President Trump announced drastic increases in U.S. tariffs. While uncertainty over these tariffs may have affected March job creation, the effects of the actual tariffs will only be reflected in the data starting with April data. The full effects of the tariffs will depend on things like: (1) Whether U.S. trade partners respond with their own tariffs; (2) Whether U.S. trade partners can come to an agreement to end the tariff war; and (3) How quickly U.S. firms can adapt their supply chains to the new tariff environment, including reshoring manufacturing jobs. A murky monetary policy outlook is even murkier.

The headlines say that PCE (personal consumption expenditure) inflation fell in January. This is a case of “Yes, but …”. In particular, it is true that the year-over-year PCE inflation rates fell from 2.6% (December 2024) to 2.5% (January 2025) in the case of overall PCE inflation, and from 2.86% to 2.64% for core PCE inflation (that is, excluding food and energy). Looks like the Fed is doing a great job. However, the annualized month-over-month inflation rates jumped from 3.56% to 3.98% (PCE), and from 2.52% to 3.47% (core PCE).

How can we reconcile these divergent patterns to the year-over-year and month-over-month inflation rates? As we have previously explained, the year-over-year inflation rate is roughly the average of the past 12 month-over-month inflation rates. For example, the year-over-year inflation rate for December 2024 is the average of the 12 month-over-month inflation rates in 2024. Similarly, the January 2025 year-over-year inflation rate is the average of the 12 month-over-month rates running from February 2024 through to January 2025. As a result, every month the calculation for the year-over-year inflation rate adds in to this average the current month reading of the month-over-month inflation rate while simultaneously dropping out the monthly rate from 13 months ago. With all of this in mind, for core PCE inflation, the year-over-year rate for January 2025 added in the January 2025 month-over-month rate (3.47%) while dropping the January 2024 rate (6.14%). In this case, the year-over-year rate for January 2025 fell not because of a particularly favorable month-over-month rate for January 2025, but because of an especialy high rate for January 2024!

It is for reasons like this that we developed our measure of trend inflation. Without getting into the details, our measure of trend inflation is a “constant gain” measure of the average month-over-month inflation rates: it applies a constant weight to the current month-over-month rate, with the remaining weight applied to the previous month’s reading of the trend. Our measure of trend PCE inflation rose from 2.52% (December 2024) to 3% (January 2025) while our measure of trend core PCE inflation rose from 2.4% to 2.76%.

Another desirable feature of our trend inflation measure is that it responds reasonably quickly to changes in underlying trend inflation. Visually, we can see that the month-over-month inflation rates have trended up over the last half year. Our measure of trend reflects what can be seen in the data. While the year-over-year inflation rates will eventually also reflect such a change in underlying trend, it will take nearly a year to fully reflect the change in trend. In 2021, inflation rose sharply and the Fed appeared to be asleep at the switch. In particular, our trend measure was rising pretty quickly during 2020 and moved over the 2% target by midyear while the year over year measure stayed below 2% throughout the year and into 2021. One can only hope that the Fed learned something from its earlier mistake.