Month: September 2025

PCE Inflation: Still Too High

Posted on by Paul Gomme

By Paul Gomme and Peter Rupert

About the only good thing that can be said about the incoming PCE inflation data: It could have been worse. At an annual rate, the month-over-month overall PCE inflation rate popped up to 3.22% in August from 1.97% in July; the corresponding core PCE inflation rate slipped from 2.86% to 2.76%. The annual (year-over-year) PCE inflation rate rose from 2.60% to 2.74%; core, from 2.85% to 2.91%. Finally, our measure of trend PCE inflation rose to 2.72% from 2.46%; trend core PCE inflation fell slightly to 2.84% from 2.88%.

And exactly what is so troubling in terms of the real side of the economy? Granted, there have recently been some very low employment numbers. Yet, a broader look at the labor market doesn’t add up to ringing the alarm bell and lower rates. In terms of job openings, outside of the pandemic, the rate of job openings is pretty much the highest it has ever been. There has been no obvious change in the rate of layoffs. The unemployment rate remains quite low by historical standards. Real gross domestic product was recently revised up, from 3.3% to 3.8%. Using monthly data on non-farm payroll
employment, industrial production, real personal income excluding transfer payments,
and real manufacturing and trade sales, the probability of being in a recession (here is the Piger website) is 1.0%.

Policy Outlook

In the FOMC’s recent announcement reducing its policy rate by 25 basis points, the committee expressed its opinion that the balance of risks has shifted towards unemployment…and away from inflation. We stand by our earlier opinion that job number 1 for the Fed is low and stable inflation; good real-side outcomes will ultimately result from executing on the inflation front. The risk to the policy outlook is that 3% inflation is the new de facto target, up from the stated 2% target. Already, short-term inflation expectations have risen. Experience from the 1970s and 1980s tells us that it is economically painful to reduce expected inflation. Responsible policy would see the Fed bringing inflation back down to its 2% target, with fiscal policy addressing the jobs situation.

Movin’ on up

Posted on by peter.c.rupert

By paul gomme and peter rupert

The BLS announced that the Consumer Price Index (CPI) increased 4.69% on an annualized basis. There is little doubt that inflation is moving in the wrong direction from the Fed’s 2% target. The year-over-year measure grew 2.94%. Our preferred trend measure jumped more than a half percentage point, from 2.42% in July to 3.18% in August. All measures have shown a distinct upward trend since April.

The core measure (excluding food and energy) shows a similar pattern. The annualized increase for August jumped to 4.23%, the year-over-year measure grew 3.11% and the trend measure popped to 3.38%.

While there is, and will be, considerable chatter over the effects of tariffs on goods prices, one would imagine that service sector prices may be more immune to the tariffs compared to goods prices. Unfortunately, the news is not good for service sector prices either. All of the measures are well above the 3% mark: 3.69% for trend, 3.90% annualized and 3.81% year-over-year.

what does this mean for policy?

Obviously, the inflation numbers have put the Fed in even more of a quandary. If it were not for the increase in the service sector prices some people could claim that the tariffs have increased the price level but may not have future inflation effects. While the Fed’s preferred measure of inflation comes from the Personal Consumption Expenditures (PCE) price index (to be released on September 26, after the upcoming FOMC meeting next week), the two price indices tend to move together.

Although there has been some weakness in the real side of the economy, the labor market more than GDP, the FOMC certainly does not want to see an inflationary episode similar to what happened a few years ago. Here is a longer time series of the core CPI:

The high CPI inflation during 2022 meant that real purchasing power was eroding because prices were outpacing hourly earnings growth.

However, initial claims for unemployment insurance, released today, showed a decidedly upward tick, providing some more evidence of a weakening labor market.

Overall, it is our view that the inflation risks outweigh the real-side risk. There’s already chatter that maybe 3% is the new 2%.

August employment not very August

Posted on by peter.c.rupert

by paul gomme and peter rupert

The Bureau of Labor Statistics (BLS) announced that the establishment survey showed that payroll employment was little changed, rising 22,000. In addition, June was revised down 27,000 and July up slightly, 6,000, for a net decline over the previous two months of 21,000. The government sector declined by 16,000.

The goods producing sector shed 25,000 and has declined in each of the last four months. Since July of 2000 employment in that sector has declined by about 3 million jobs. There has been a lot of research on what is known as the “China shock” that occurred when China entered the World Trade Organization (WTO) in 2001. Here is an article discussing some of the findings of the research.

Policy Outlook

At this stage, there is little doubt that the FOMC will cut the Fed funds rate at its upcoming September meeting. The big question is: How will markets respond? If the Fed is seen as capitulating to the White House, inflation expectations will rise, and so will market interest rates. However, those on the FOMC who are calling for a rate cut can make plausible arguments unrelated to any pressure from the White House. Our view is that inflation is still not under control and has been increasing of late and so cuts to the fed funds rate is premature.