Month: February 2025

PCE Inflation Spikes

Posted on by Paul Gomme

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.

CPI inflation spikes

Posted on by peter.c.rupert

By paul gomme and peter rupert

The Bureau of Labor Statistics (BLS) announced that the Consumer Price Index (CPI) for all items rose 0.5% over the month or 5.75% on an annualized basis. This is the largest increase since August of 2023. The year-over-year increase was 3.00%. Our preferred trend measure rose 4.12% on an annualized basis. As the graph below shows, all of the measures have been inching up over the past few months.

Removing food and energy from the index, the core measure, increased 5.49%, the highest reading since April of 2023. The year-over-year number increased 3.29% and the trend measure was up 3.85%.

No matter how one slices it, the inflation numbers are not moving in the right direction. The rise in prices was broad-based, the only major category that decreased over the month was apparel. Later this month, the FOMC’s preferred measure of inflation, core PCE, will be released. There’s a high correlation between CPI and PCE inflation, and it seems unlikely that this measure of inflation will near the committee’s 2% target.

Fed Chair Powell began his testimony to the House Financial Services Committee this morning and will likely have a tough time given the broad based spike in prices. Needless to say, this does not bode well for an easing of interest rates in the near term.

January Employment: meh

Posted on by peter.c.rupert

by paul gomme and peter rupert

The BLS announced that the establishment survey revealed a 143,000 increase in employment in January, 111,000 of that came from private payrolls. Moreover, all of the private employment increase came from the service sector as the goods producing sector had a net of zero. November was revised up by 49,000 and December by 51,000.

Average hours worked in January fell to 34.1 hours. Apart from the pandemic, the last time it was 34.1 was back in April of 2010. With the 111,000 increase in private employment and the reduction in average hours of work, total hours worked also fell.

Average hourly earnings for private workers rose 0.5% over the month (5.9% on an annual basis). Using various inflation measures, real hourly earnings have been steadily rising over the past couple of years.

The household survey indicated that the labor force participation rate increased from 62.5% to 62.6% and the employment to population ratio increased from 60.0% to 60.1%. The unemployment rate fell from 4.08% to 4.01%.

An article in the New York Times suggested that the jobs report would be “confusing” due to massive revisions owing to an annual process that reconciles the differences between the establishment and household surveys. Our reading: not so much. There was no revision to the household survey employment numbers. While establishment survey employment was revised down some 610,000 as of December 2024, the level of employment was around 159 million. While 610,000 would be a massive change on a monthly basis, that’s not the right way to think about the revision since the revisions are spread over many months. A better way to think about the revision: the level of employment in December was revised down roughly 0.4%. The figure below shows substantial downward revisions in January and March 2024, and similarly large upward revisions for November and December.

On Tuesday, the BLS released the job openings and labor turnover summary (JOLTS). The job openings rate fell somewhat but hires and separations changed little.

On Thursday, the BLS released data on productivity and costs. Growth in productivity fell from 2.3% in 2024Q3 to 1.2% in 2024Q4. Most of this decline can be attributed to a fall in output growth (from 3.6% to 2.3%). Growth in hours worked also fell, from 1.3% to 1.0%.

The labor market, as always, has some ups and downs in the underlying components. Job growth was so-so and both the labor force participation rate and employment to population ratio rose. Average hourly earnings show strong growth. However, average hours of work and total hours fell as did productivity. These reports do not really alter the “wait and see” approach outlined by the FOMC after their recent meeting.