Month: March 2024

Uh oh! While the year-over-year inflation rate as measured by the PCE deflator was essentially unchanged in February (it rose slightly, from 2.43% in January to 2.45%), the annualized month-over-month inflation rate, at 4.1%, is still running well above the Fed’s 2% target. Our measure of trend inflation rose half a point, from 2.6% to 3.1%. It bears repeating that our measure of trend inflation is designed to filter out much of the high frequency movements in the month-over-month inflation rate while responding in a timely fashion to changes in the trend.

The outlook is not much better when the “volatile” food and energy components of the PCE deflator are removed: The month-over-month inflation rate dropped from 5.6% to 3.2% (good), but is still well above the Fed’s 2% target (bad). The year-over-year inflation rate fell slightly, from 2.9% to 2.8%. And our measure of trend inflation was essentially unchanged, coming in at 3.16%.

The Policy Outlook

In a sense, the latest core PCE inflation numbers are not a surprise: they were foreshadowed by core CPI inflation which came out a couple of weeks ago. For the first two months of 2024, trend core inflation is up and is considerably higher than the Fed’s 2% target. If the monthly inflation rate continues to come in on the high side, expect to see the year-over-year inflation rate start to rise — just as it did in 2020-21. Along side the solid GDP growth and labor market, recent inflation makes it easier for those building a case for raising (or not lowering) interest rates.

The annual (12 month-over-12 month) inflation rate as measured by the CPI rose marginally, from 3.11% to 3.17% in February. Taking out the volatile food and energy components, core CPI inflation was down marginally, from 3.87% to 3.76%. So, overall no change? As we have emphasized in the past, annual inflation rates respond sluggishly to changes in trend. The monthly annualized CPI inflation rate rose smartly, from 3.73% to 5.44% while annualized core CPI inflation fell from 4.81% to 4.39%. As we have previously discussed, monthly inflation rates are quite variable. Our trend measure of CPI inflation popped up from 3.06% to 3.85%; trend core CPI inflation saw an upturn from 3.89% to 4.06%.

Policy Outlook

The FOMC tends to look at core PCE inflation, not CPI inflation. However, the PCE data for February will be released in a couple of weeks. Given the overlap in the goods and services covered by the CPI and PCE, the February CPI report provides some “news” regarding the likely direction of the upcoming PCE data. Sorry folks, but the short term prospects for interest rate cuts are dim. At the horizons we report, PCE inflation for January exceeded the Fed’s 2% target, whether overall or the core measure. Given that the February CPI data shows an increase in inflation, it seems unlikely that PCE inflation for February will be heading down towards 2%, and may well be up from January. The Fed is unlikely to let inflation get out of hand as it did in 2020. At this juncture, it’s easier to make a case to raise, not lower, interest rates, especially since the real economy (labor market, productivity and GDP) has not shown signs of weakening.

By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

By Paul Gomme and Peter Rupert

The BEA announced that the Personal Consumption Expenditure (PCE) price index rose 0.3 percent over the month, 4.22 percent on an annualized basis. While the monthly spike was high, the year over year number fell from 2.62 percent to 2.40 percent. Our preferred trend measure rose from 1.57 percent to 2.45 percent.

As we mentioned in the CPI post of February 14, given the relationship between changes in the CPI and PCE it was expected that the PCE would also likely rise. In terms of policy, the Fed tends to concentrate more on the core PCE index. The core measure also blipped up, the annualized monthly number came in at 5.10 percent for January after a 1.75 percent December number. Year over year the core measure fell slightly, from 2.94 percent to 2.85 percent. Our calculated trend inflation came in at 2.99 percent after a 1.94 percent December reading.

At least some news outlets have emphasized the decrease in the year-over-year PCE inflation rate, with the pop up in the monthly, annualized rate treated as an afterthought. As the saying goes, ”Those who forget their history are condemned to repeat it.” In 2021, monthly inflation started running well above the FOMC’s 2% target; it took at least half a year before the 12 month inflation rate reflected this increase. While one month doesn’t make a trend, the size of the increase makes it difficult to build a strong case for loosening monetary policy in the near term. We will be looking closely at the CPI report that comes out in a couple of weeks time.