By Paul Gomme and peter rupert
Late this month, we’ll get data on core PCE (personal consumption expenditure) inflation — the measure favored by the Fed. In the meantime, we have CPI inflation which is a noisy signal of what to expect of PCE inflation. The signal points to higher inflation. On a year-over-year basis, core CPI inflation rose from 2.77% to 2.91%. However, this measure of inflation responds slugglishly to changes in trend. The annualized month-over-month rate popped up from 1.57% to 2.77%, or 1.2 percentage points. Meanwhile, our trend measure increased by 0.15 percentage points, from 2.30% to 2.46%.
Overall CPI inflation paints a similar picture: the month-over-month rate rose from 0.97% (annualized) to 3.50; the year-over-year from 2.38% to 2.67%; and our trend measure from 1.91% to 2.43%.
Policy Implications
No doubt, some will attribute at least some of this increase in CPI inflation to the effects of the Trump tariffs. In our opinion, this sort of attribution will require deeper analysis than is afforded by the Bureau of Labor Statistics’ CPI release, and may only be knowable when we have several more months (or years) of data.
If PCE inflation for June (to be released on July 31) similarly increases, FOMC doves and those auditioning to be the next Chair of the FOMC will have a hard time making a convincing economic case for lowering the Fed’s policy interest rate; especially since the real side of the economy has managed to withstand tariff threats and geopolitical intrigue.
