U.S. Economic Snapshot

By Paul Gomme and Peter Rupert

The Bureau of Economic Analysis has released Personal Consumption Expenditure data for May. On an annual basis, overall PCE inflation rose from 5.03% (April) to 5.53% (May). The year-over-year inflation rate also increased, from 3.80% to 4.07%. Our measure of trend PCE inflation is similarly up, from 5.29% to 5.37%. The Fed’s stated target is 2% inflation.

The Fed’s preferred measure, core PCE inflation shot up from 3.05% to 3.91% (month-over-month, annualized), or from 3.32% to 3.41% (year-over-year). Our measure of trend: 3.75%, up from 3.67%.

The new FOMC Chair, Kevin Warsh, has his job cut out for him. To be sure, after inflation rose in the post-pandemic environment, the Jerome Powell-led Fed failed to bring inflation down to its 2% target. Developments in the US-Iran war have, no doubt, contributed to the increase in overall PCE inflation. However, core PCE inflation — which strips out the “volatile” food and energy components — is far less susceptible to these developments.

To understand the problem facing Warsh, suppose that there are two types of central bankers: hawks who are tough on inflation, and doves who are not. It’s cheap for central bankers to go around telling everyone that they’re a hawk. Such speeches are largely uninformative. The implication is that when there is a change in leadership, the public is quite uncertain whether the new leader is a hawk or a dove. (We’re ignoring the unlikely case in which the central banker wants to be known as a dove.) How does a central banker gain a reputation for being a hawk? By making tough decisions that a dove would not. In the current environment, a dove would be prone to lowering the Fed funds rate; a hawk would raise it. Leaving the rate unchanged may well be interpreted as being dove-like. Importantly, once a central banker comes to be viewed as a dove, it is very difficult to rehabilitate that reputation: it would requite a prolonged period of hawk-like actions. Assuming that Warsh is committed to a 2% inflation target, he has a tough choice between: (a) immediately behaving like a hawk, raising the Fed funds rate; or (b) later acting like a hawk and for a much longer period of time. Acting later will be economically more disruptive than acting preemptively. Good luck Mr. Warsh.

By Paul Gomme and Peter Rupert

Squinting just the right way, one may see some good news in the recent CPI report. To be sure, inflation is running far too high. On an annualized month-over-month basis, inflation was 5.82% in May — but that’s down from 7.96% in April. Our measure of trend inflation was 6.14% in May compared to 6.30% in April. That the year-over-year inflation rate rose from 3.78% to 4.17% chiefly reflects the burst in inflation that started with the US-Iran war.

The story is much the same with core CPI (that is, after stripping out food and energy prices). The month-over-month rate fell from an annualized 4.61% (April) to 2.53% (May); our measure of trend also fell from 3.26% to 3.01%. Again, the year-over-year measure rose, from 2.74% to 2.82%.

What all of this means for monetary policy is anyone’s guess. New Fed Chair Kevin Warsh is said to prefer trimmed mean measures of inflation. In brief, trimmed means throw out those prices with the highest and lowest changes in any given month. We suppose Warsh means trimmed PCE inflation, but maybe he means trimmed CPI inflation. Will the rest of the FOMC go along with Warsh? The danger in switching from core PCE to trimmed mean PCE inflation is that the Fed may be seen as acting opportunistically, choosing a measure of inflation that fits preconceived notions regarding the future trajectory of the Fed funds rate.

Employment report

The BLS announced that payroll employment increased 172,000, again crushing expectations. The private sector added 120,000 and the government also showed an increase of 52,000.

It has not been a very good year for private forecasters when it comes to employment…no one said it was easy!

	Employment Forecast	Actual
January	55,000	160,000
February	50,000	-156,000
March	59,000	202,000
April	62,000	177,000
May	88,000	172,000

Average weekly hours remained at 34.3 and average hourly earnings rose from $37.41 to $37.53.

The household survey showed an increase of 149,000 and the number of unemployed persons fell by 66,000. The unemployment rate fell slightly, from 4.34% to 4.30%.

Overall, the labor market continues to perform above “expectations” and will make it difficult for policy makers to point to a weak economy.

By Paul Gomme and Peter Rupert

The BEA announced that the PCE price index rose 4.90% in April, down from the 8.27% March reading. The year over year number increased from 3.53% to 3.77% and our preferred trend measure rose 5.22% after a 5.38% increase in March. All well above the Fed’s 2.0% target.

The PCE price index excluding food and energy fell from 3.60% to 2.91%, the year over year number rose to 3.77% from 3.53% increase in March and the trend measure fell to 5.22% in April compared to 5.38% in March. Again, these inflation rates are well above the Fed’s stated 2% target.

In it’s second estimate of GDP for the first quarter, real GDP growth was revised down from 2.0% to 1.6%, mostly due to investment and consumer spending revisions.

The two reports don’t add much in the way of clarity as to future Fed Funds moves. The Fed-favored PCE is still solidly above the 2.0% target and the economy remains strong despite the downward revision to GDP. New Chair Kevin Warsh also adds to the uncertainty it becomes clearer what kind of Chair he will become.

The good news from the Bureau of Labor Statistics’s CPI report is that annualized monthly CPI inflation fell from 10.89% (March) to 7.96% (April). Compared to a year ago, prices are up 3.78% (April) compared to 5.47% (March). Our measure of trend CPI inflation rose from 5.47% to 6.30%.

Core CPI inflation (that is, excluding food and energy) rose from 2.38% to 4.61% on an annualized monthly basis; from 2.60% to 2.74% for the year-over-year. Our measure of trend core CPI inflation rose from 2.58% to 3.26%.

Of course, the big news is the energy price shock due to the ongoing conflict in the middle east. Looking at energy commodities (gasoline and fuel oil), April (92.8%) also fell compared to March, 919%, but the March number was in rarefied air, see the scale on the vertical axis. Moreover, inflation expectations have begun to creep up. The hope, of course, is that the oil supply problem will be a temporary blip.

The Personal Consumption Expenditure price index will not be released for a couple of weeks. While the CPI for April suggests that monthly PCE inflation may fall, all other measures — including the all-important core PCE inflation — are likely to continue moving away from the FOMC’s 2% target.

by paul gomme and peter rupert

The BLS announced that payroll employment increased 115,000 in April and March employment was revised up 7,000 to 185,000 and February was revised down 23,000 to 156,000.

The private sector added 123,000 jobs while the government sector shed 8,000, falling for seven consectutive months. Nearly all of the increase in employment came from the service producing sector, up 113,000.

Average hours of work rose from 34.2 to 34.3 and has been see-sawing between these two over the past few months. The increase in both private employment and average weekly hours means that total hours of work showed a strong increase. Average hourly earnings increased to $37.41 from $37.35.

According to the household survey the civilian labor force declined 92,000, the number unemployed increased 134,000 and then number employed fell 226,000. The end result was a slight uptick in the unemployment rate, from 4.26% to 4.34%. Note that, due to rounding, the BLS reported that the unemployment rate was unchanged at 4.3%.

While the establishment survey beat “expectations” and was taken as good news by the market, the household survey poured a little cold water on the outlook. Having said that, the labor market continues to exhibit more strength than weakness.

by paul gomme and peter rupert

The BEA came out with two important announcements on the heels of the FOMC decision to not raise the Federal Funds Rate (good call). While the price indices were higher than the Fed’s 2% target, they were in the “what should we do now” range. That is, the members of the FOMC were debating whether to lower or keep the rate at its current level and what to say about future policy.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Philip N. Jefferson; Anna Paulson; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting; and Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time.

The PCE price index rose 8.23% in March. Year-over-year it rose 3.5% and our preferred trend measure rose 5.30%.

The core PCE (ex food and energy) rose 3.58% on an annual basis, year-over-year 3.2% and the trend measure up 3.86%.

REal GDP

The BEA also announced that the advance estimate of real GDP for Q1 increased 2.0%. Personal Consumption Expenditures rose 1.6% and Private Investment rose 8.7% with the equipment component of investment rising 17.2% and Intellectual property products rising 13.0%. The Government sector rose 4.4%.

On a more negative note, both residential and non-residential structures investment have been in negative territory for quite some time.

Policy outlook

The real side of the economy continues a steady increase at the same time inflation has moved up considerably. It is interesting to conjecture what the Fed votes would have been had these reports come out before yesterday’s meeting. Mind you, today’s releases should not be a huge surprise to the FOMC. The Consumer Price Index release earlier this month signaled higher inflation, and economists at the Board of Governors are really good at now casting, so the National Income and Product Accounts data was almost certainly largely known.

by paul gomme and peter rupert

The BEA announced that the price index for Personal Consumption Expenditures (PCE) rose 4.60% on an annualized basis, the largest increase over the past year. Our preferred trend measure increased 3.75%, the largest increase in three years. The fact that the year-over-year increase actually fell (2.83% to 2.80%), and remains low, underscores our use of the trend measure: the year-over-year measure moves slowly.

Lest one thought that the reason for the big jump in the PCE was due to the roiling in the oil/energy market, prices in the PCE bundle excluding food and energy rose 4.49% on an annualized, though fell slightly from January’s reading of 4.81%.

One area that showed a major jump was in goods prices, likely affected by the disruption of transportation. Goods prices increased 9.27% on an annualized basis and our trend measure was up 4.36%.

Meanwhile, the Bureau of Labor Statistics released the Consumer Price Index (CPI) data for March. Ugly results are seen in the overall CPI picture. On an annualized basis, the month-over-month inflation rate rose from an unacceptable 3.25% (February) to an even worse 10.89% (March). To be sure, this increase was largely driven by the energy component of the CPI. The one month (that is, not annualized) price changes were: gasoline +21.2%, fuel oil +30.7%, overall energy +10.9%. To put these numbers into perspective, the one month change in the CPI was +0.9%. The year-over-year inflation rate rose more moderately, from 2.43% (March) to 3.29% (April). Our trend measure rose from 2.76% to 5.47%.

Turning to core CPI (that is, excluding food and energy), the annualized month-over-month inflation rate actually fell from 2.62% (February) to 2.38% (March) while the year-over-year tate rose slightly from 2.47% to 2.60%. Our measure of trend inflation also fell, from 2.68% to 2.58%.

Given the increase in inflation recorded in the March CPI report, we expect that the March PCE will similarly increase. However, these increases can be directly traced to the effects of the U.S./Israeli-Iran war on global oil supply and prices. The consensus among news commentators is that the effects of these global oil shocks will be temporary: Iran will allow shipping through the Strait of Hormuz to return to pre-war levels which will increase global oil supply. Even so, the effects on prices may last months. In such a circumstance, focusing on core inflation measures is justified. Further, measures of expected inflation do not indicate lasting effects.

Obviously, the jump in prices will affect the Fed’s next rate decision, but with the strong reading in the employment numbers and the current inflation numbers we see little chance in an interest rate cut in the near future.

by paul gomme and peter rupert

The BLS announced that payroll employment increased 178,000. The private sector added 186,000 while the government sector shed 8,000 jobs. Revisions to the two previous months were pretty much a wash, with January revised up 34,000 and February revised down 41,000.

The private service sector added the bulk of the jobs, increasing 143,000 with 89,900 coming from health care and social assistance.

Average weekly hours fell from 34.3 to 34.2. Combined with the employment change means that total hours fell slightly. Average hourly wa

Average hourly earnings rose from $37.29 to $37.38. Over the year earnings growth continues to outpace CPI inflation, meaning real wages have been rising since 2023.

The year-over-year core PCE inflation rate ticked up from 3% in December to 3.06% in January. The outlook is worse in the sense that the annualized month-over-month core PCE inflation rate has been running well over 4%. As discussed in previous posts, the year-over-year rate is roughly the average of the previous 12 month-over-month inflation rates. As a result, the change in the year-over-year rate between December 2025 and January 2026 is determined by the difference in the month-over-month observation being added into this 12 month average, 4.45% for January 2026, and the observation being dropped, 3.84 for January 2025. Our trend measure of inflation is the happy medium of the volatile month-over-month rate and the slow-to-adjust year-over-year rate. Trend core PCE inflation rose from 3.14% in December to 3.58% in January.

Year-over-year overall PCE inflation fell slightly from 2.91% in December to 2.83% in January as the month-over-month rate fell from 4.39% in December to 3.35% in January. Our trend measure moved up from 3.26% to 3.29%.

Policy Outlook

The bottom line is that core PCE inflation is running well above the Fed’s 2% target. Keep in mind that the latest PCE release is for January 2026. Earlier this week, CPI data for February was released. It is not until April 9 that the corresponding PCE data will be available — the delay once again due to the month-long federal government shutdown in the Fall. Consequently, the effects of the runup in oil prices in anticipation of the war with Iran have yet to show up in the PCE price data. While core inflation measures strip out the immediate effect of changes in energy prices, the effects of the war will eventually filter into other prices, partly through increased transportation costs that will be priced in to final goods prices, and eventually into food prices since the Middle East is an important supplier of fertilizer ingredients.

by paul gomme and peter rupert

The BLS announced that the CPI in February rose 3.25% on an annualized basis. Year over CPI inflation was 2.43% up from 2.39% in the previous month. Our preferred trend measure was little changed at 2.68% compared to the previous month. Anticipation of the war appears to have pushed up oil prices in February which may account for the 11.1% (250% annualized) monthly increase in fuel oil.

The annualized core measure (ex food and energy) fell from 3.59% to 2.62%, year over year changed little coming in at 2.47% compared to 2.51% in the previous month. Our trend measure, 2.68% was little changed from the previous month’s 2.71%.

Drilling down farther, the CPI for services less rent on shelter shows a 3.34% increase in our trend measure, although the monthly number has come down from 4.25% in January to 3.43% in February.

The Fed continues to be in a bit of a pickle. While inflation is moving in the wrong direction, there are signs of weakness in the labor market. At this time, however, keeping inflation in check is job one for the Fed and we see no convincing argument for lowering rates in the near future.