CPI Continues Climbing

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The BLS announced that CPI inflation fell from 8.07% to 4.28% on an annualized basis (that is, month-over-month), the year over year rate increased from 3.72% to 3.95%, and our trend measure dropped slightly from 4.62% to 4.51%.

The monthly core CPI inflation rate declined from 4.09% to 3.61%, annual crept up from 2.57% to 2.77%, and our trend measure ticked up from 3.11% to 3.28%.

The 16% trimmed mean inflation measure rose from 3.53% to 4.52%. However, the use of new, alternative measures, like a trimmed mean, by the FOMC is still an open question.

The Fed pause at the last FOMC meeting came with a 10-2 vote, with Cook and Hammack dissenting, preferring a 25 basis point increase. The FOMC statement included “The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal.” While there were small declines in a couple of the measures, all remain well above the 2 percent goal.

October Employment Report

Posted on by Paul Gomme

The Bureau of Labor Statistics reports that in October, nonfarm payroll employment increased by 165,000. On the face of it, these are solid — but not spectacular — gains. However, as we have discussed in earlier posts, trends in labor market participation and — most importantly — population growth have changed the number of job gains necessary to maintain an unchanging unemployment rate. Indeed, the unemployment rate nudged down from 4.18% in September to 4.14% in October.

Average weekly hours remained at 34.4 and therefore, along with private employment, total hours of work increased.

Unemployment insurance initial claims numbers suggest that the unemployment rate is unlikely to change much in the near future.

Those entering unemployment can be categorized as those: (a) leaving their jobs voluntarily, (b) losing their jobs involuntarily, (c) reentering the labor force, and (d) new entrants to the labor force. While new entrants have been trending up over the past several years, the other categories have been flat. On the other end, the number of persons unemployed 27 weeks or longer has been rising.

The Job Openings and Labor Turnover was also released this week and showed a slight increase in the job openings rate as well as the quit rate.

Overall, the labor market remains strong. With the recent spike in inflation it seems more than likely that the Fed will raise rates at the next, maybe the next few, meetings.

Pity the Fed

Posted on by Paul Gomme

October 29 was a “data rich” day with the Bureau of Economic Analysis releasing data on personal income and outlays for September as well as its first release for the National Income and Product Accounts (NIPA) for the third quarter. The importance of the personal income and outlays data is that it includes the personal consumption expenditure (PCE) price index. On a month-over-month basis, this measure of inflation rose from an unacceptably high 3.95% (August) to 6.05% (September). To be sure, there is considerable variation in this measure and the year-over-year measure rose more modestly, from 3.44% (August) to 3.65% (September). The Gomme-Rupert measure of trend PCE inflation also increased from 3.84% to 3.91%.

The Fed’s preferred measure of inflation is based on core PCE (excluding food and energy). The monthly rate rose from 3.19% to 3.86%; the annual rate from 3.03% to 3.12%; and the Gomme-Rupert trend from 2.37% to 3.11%.

Meanwhile, output growth rose from 2.22% (second quarter) to 3.37% (third quarter). While consumption growth was unchanged at 3.77%, investment growth rose from 4.65% to 19.42%. Within investment, nonresidential equipment grew 20.88% in the third quarter, up from 13.44% in the second. Nonresidential structures grew 5.39%; this category has actually exhibited negative growth over the past year or so. Investment in residential structures was -3.34% (previously 2.81%) and has also experienced negative growth over the preceding year. Export growth was -5.74%, down from 5.04% in the second quarter; and imports grew 12.58% (down from 19.67%). Some readers may recall that on August 22, the U.S. imposed 50% tariffs on a variety of goods from Canada, and that on September 8 Canada levied countertariffs of 15, 25 and 50% on a number of U.S. goods. It seems unlikely that the third quarter exports and imports numbers were significantly impacted by these tariff increases since they were unexpected and came late in the third quarter.

So, would the Fed have made a different decision had they met after having these data? Overall, the economy is killing it, with GDP growth well over the long run average of about 2%. Indeed, there have been six times in the past couple of years that GDP growth has been over 3%, once over 4%. Inflation continues to run well above the Fed’s 2% target. Well, it took just a day to accumulate more info:

Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2 percent goal. The Committee will deliver price stability. (FOMC Statement)

September CPI Spikes

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The BLS announced that the CPI jumped 8.07% on an annualized basis in September. The year over year increase was 3.72% and our trend measure shot up to 4.62%.

As mentioned in earlier inflation posts, the trimmed mean is another measure that people have been looking to; it that increased to 3.53% from 2.67% in August. The core CPI (ex food and energy) increased 4.09% and our trend measure increased 3.11%.

Although the Fed has a preference for the PCE inflation measure, it seems likely, given the correlation between the CPI and PCE, that we will be seeing an increase in those numbers as well. The timing of the PCE release is unfortunate for the FOMC: the PCE data will be released on October 29, one day after the conclusion of the FOMC’s October 27-28 meeting. Further complicating matters for the FOMC: mid-term elections less than a week later. Those wishing to hold the Fed funds rate unchanged can, in addition, suggest that the effects of the Fed’s earlier tightening have not yet been realized. On the other hand, the committee may look foolish if one day after their rate decision the September PCE inflation rate is reported to have risen.

Just as a bit of an aside, why does inflation measurement seem so confusing? In any month there are possibly large price swings across the broad categories measured by the BLS or BEA. This month, for example, see what happened to energy commodities (motor fuel and fuel oil), food and medical care commodities:

While fuel and motor oil skyrocketed, food prices have been pretty tame and medical care commodities (such as prescription drugs) have been declining. The difficulty, then, is how best to understand what is happening to average prices across all the commodities? This is where the controversy comes in. Throw out food and energy? Look at an underlying trend measure? Or, in any month remove the highest and lowest 8%, i.e., trim off about 16% of price changes. The jury is still out.

September Jobs Report

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The BLS announced that the labor market was pretty flat in September. Employment rose a lean 29,000 while unemployment rate barely changed, from 4.14% to 4.18%. The flatness spanned almost all major sectors, no big gains or losses anywhere. The diffusion index (percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment) sat at 49.0, so a fairly equal balance of increasing and decreasing industries.

The employment gains recorded by the Establishment Survey, 29,000, are considerably lower than the average over the past year. Indeed, by historic standards 29,000 new jobs seems anemic. However, our discussion of the July Employment Report pointed to reasons why the U.S. economy simply doesn’t need to create as many jobs as it once did. Central to that discussion was the notion of “breakeven'” job gains: the number of new jobs that need to be created to leave the unemployment rate unchanged. Two factors have lowered breakeven job gains: a falling labor force participation rate, largely due to an aging population, and slowing population growth. The fact that the unemployment rate rose very slightly, from 4.14% in August to 4.18% in September, suggests that 29,000 is close to breakeven: about what’s needed to hold unemployment steady.

The household survey painted a slightly different picture, with the labor force rising 485,000 and the number employed up by 406,000. The chart below explains who gets counted in the two surveys.

The bottom line: with breakeven this low, headline payroll numbers that once would have signaled a slowdown now look roughly consistent with a stable labor market.

PCE Price Inflation: There’s more work to do

Posted on by Paul Gomme

According to recent BEA release, inflation as measured by the PCE (personal consumption expenditure) price index rose in August. On a month-over-month basis, this measure of inflation shot up from 0.61% in July to 3.79% in August. There was a more modest increase, from 3.36% to 3.42%, on a year-over-year basis. Our measure of trend rose from 3.36% to 3.42%.

As our readers well know, the Fed places more emphasis on core PCE inflation — that is, after removing the food and energy components. By this measure, monthly inflation rose from 1.52% to 3.01% (annualized) while the annual rate was almost unchanged, increasing from 2.98% to 3.01%. Our measure of trend bumped up from 2.46% to 2.64%.

Chairman Warsh has commented previously about inflation measures and some have suggested using a “trim” rather than a “core” measure. The PCE trimmed mean came in at 1.92% on an annualized monthly basis and 2.19% year over year. We will see what measure the Fed will start to rely on….

These inflation numbers put the Fed in a bind. 3% is well above the committee’s stated target of 2%. To be sure, the trimmed mean PCE inflation rate is near the Fed’s target — but there’s always a danger that the Fed will be seen as shopping for some measure of inflation that meets its target. While the FOMC raised the Fed funds rate by 0.25 percentage points at its last meeting in mid-September, it’s not clear that this increase is sufficient to bring inflation down to target in a timely fashion.

August CPI: Inflation is up (again)

Posted on by Paul Gomme

The Bureau of Labor Statistics’ September CPI release reports a marked increase in month-over-month inflation from 0.89% to 4.86% on an annualized basis for the overall CPI, and from 2.62% to 3.53% for core CPI. There was little change in the year-over-year inflation measures: From 3.30% to 3.35% for overall CPI, and a modest decline from 4.47% to 4.45% for core CPI. As we have discussed in previous posts, our trend measure of inflation takes a middle ground between the highly volatile month-over-month measures and the extremely sluggish year-over-year measures. Our measure of trend inflation rose from 1.92% to 2.90% for overall CPI, and a more modest increase, from 2.17% to 2.62%, for core CPI.

The 16% trimmed mean CPI inflation rate was little changed: it fell from 2.71% in July to 2.67% in August. As mentioned in an earlier post on the CPI and trimmed mean, there is a lot of noise in monthly price movements. The “core” notion, removing food and energy, is a now often used measure. As can be seen above, the headline number moved up substantially and the core measure by a little less. While the core removes food and energy alone, the price movements across all areas can also be volatile. The components graph below shows a few different categories, with medical care prices falling substantially. The 16% trimmed mean removes the top and bottom 8% of the price changes.

By almost any measure, the price numbers remain well above the Fed’s 2% target, putting more likelihood on rising interest rates in the near future.

August Employment

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The BLS announced that payroll employment increased 162,000 in August, the second highest since December, 2024. Private employment was up 127,000.

Average weekly hours increased 0.1, now sitting at 34.4, and with the 127,000 increase in employment total hours of work increased by 0.39%. Total hours measures the hours of work that firms paid to produce output. While the headline employment number is what the market tends to react to on announcement, notice there can be times when employment rises but total hours fall, meaning firms actually paid for fewer hours. A glaring example is February and March. The number of employed persons fell by 148,000 in February and total hours also fell. However in March, private employment rose by 202,000 yet total hours paid fell.

The household survey reported an increase in employment of 569,000. Labor force participation increased from 61.4% to 61.6%. The number of people not in the labor force shrank by 551,000. These changes increased the unemployment rate slightly, from 4.09% to 4.14%.

July PCE Price Index

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The BEA announced that the PCE price index for July rose 1.89% at a seasonally adjusted annual rate. The year over year rate increased 3.70% and our trend measure increased 2.84% after an increase of 3.31% in June and 5.52% in May.

The PCE ex food and energy increased 2.99% at a seasonally adjusted annual rate. The year over year increase came in at 3.44%, the same as in June. Our trend measure increased 3.14% (interesting, economists typically use \pi to indicate inflation!), a slight easing from the 3.22% reading in June.

Some readers may recall that Fed chairman Kevin Warsh has been talking about trimmed mean measures of inflaton. Fortunately for us, folks at the Dalls Fed have done the hard work of producing such measures. The monthly series is extremely volatile and so it’s not clear it’s a very good measure of `trend’ inflation (meaning: where is inflation going). The annual version is much smoother, but probably suffers from issues we’ve discussed before: as an annual measure, it responds slowly to changed in the underlying trend. As with other measures of PCE inflation, these series exhibit a downward trend starting in 2023. And as with other measures of PCE inflation, the Fed still has work to do to bring inflation down to its 2% target.

The inflation numbers remain elevated and are certainly front and center at the Jackson Hole meeting this week.

July CPI

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The BLS announced that the CPI rose 0.89% on an annualized basis. The year over year increase was 3.30%. Our trend measure came in at 1.92%. The CPI ex food and energy saw a 2.62% increase on an annualized basis with the year over year measure at 2.47% and the trend measure at 2.17%.

It is obvious from the graphs that inflation has been trending down over the past few years. The new Fed Chair, Kevin Warsh, has mentioned that he is thinking about alternative measures of inflation, such as some form of trimming. See the recent post on this here. The 16% trimmed mean, first introduced by the Cleveland Fed came in at 2.71%.

Since the spike in 2021-22, inflation has receded but remains somewhat elevated. Although the Michigan consumer inflation expectations consumer’s expectations shows inflation near 5% one year out, the implied measure from the Cleveland Fed shows a much tamer view.

Inflation expectations can also be derived from financial data. For a particular maturity, breakeven inflation is defined as the difference between the nominal return on government securities (Treasury Constant Maturity Securities) and the real return on government securities (Treasury Inflation-Indexed Constant Maturity Securities). Breakeven inflation represents market participants’ expectations for inflation at various horizons, from 5 to 30 years. Since 2021, markets have consistently priced in expectations for inflation that exceed the Fed’s 2% inflation target. However, we should adjust breakeven inflation to account for the fact that the Treasury Securities pay out based on the all items CPI, not core PCE, inflation. Historically, CPI inflation runs between 1/3 and 1/2 percentage points higher than PCE inflation. On this basis, markets may be pricing in inflation at the Fed’s stated 2% target.

It is evident that by almost any measure, the Fed has its work cut out. As always, it is a balancing act. If indeed, as Warsh has admitted, 2% will be hit, then it is much more likely to see rate increases going forward.