Month: February 2026

by paul gomme and peter rupert

The BEA announced that real GDP increased 1.4% in Q4 and 4.4% in Q3. Consumption grew at 2.4%, the largest contributor to overall GDP growth.

Real investment increased 3.8%. Non-residential structures investment declined for the eighth straight quarter and residential investment has declined in six of the last eight quarters. The biggest drag on GDP came from the government sector, falling 5.1% and contributed -0.9 percentage points to overall GDP.

Prices

No good news for prices. The BEA announced that the personal consumption expenditures price index (PCE) increased 4.35% in December on an annualized basis. Our preferred trend measure increased 3.23%. Excluding food and energy, prices also rose 4.35% and our trend measure came in at 3.11%. Of particular note: all of the PCE-based inflation measures that we report on a regular basis are up and well above the Fed’s 2% target.

Keep in mind that the Federal government shutdown in October 2025 has delayed the release of PCE data. Prior to the shutdown, the December data would have been released at the end of January, not late February. We’ve been using a naive forecast of PCE inflation using CPI inflation data. This forecast did not do too well for December. Trend PCE inflation for December was forecast to be 2.47% (down 20 basis points from November); in fact, this measure of inflation was 3.23% (up 56 basis points). Similarly, trend core PCE inflation was forecast at 2.11% (down 39 basis points) whereas it actually rose to 3.11% (up 61 basis points). With all of this in mind, the forecast for January is: trend PCE inflation, 2.29%; trend core PCE inflation, 2.46%.

Policy outlook

Given the rise in the inflation numbers and a moderate change in GDP, it certainly seems like there isn’t much of a chance for an interest rate cut any time soon. The labor market (see below) doesn’t change that view since the report last month did not have any major surprises.

by paul gomme and peter rupert

The BLS announced that employment rose by 130,000 in January. Of particular interest, the private sector added 172,000 jobs as the government shed 42,000.

The goods producing sector saw an increase of 36,000 jobs, mostly in the construction sector, up 33,000. Something we haven’t seen in a while…manufacturing employment increased 5,000, the first increase in, well, a lot of months. The information sector, however, continues to shrink, losing another 12,000 jobs.

As noted in its press release, the BLS annual benchmarks the establishment data against more comprehensive measures of payroll employment. This benchmarking exercise lowered nonfarm employment for March 2025 by 860,000 for the raw data, and by 898,000 for seasonally adjusted data. These downward revisions dwarf the 181,000 jobs gained for all of 2025.

The household survey, that collects information on the civilian labor force status, showed that the labor force (the sum of employed and unemployed) increased 387,000 while the number of unemployed fell 141,000, leading to a slight decline in the unemployment rate from 4.38% to 4.28%.

Overall CPI inflation fell in January. The annualized monthly inflation rate fell from 3.63% in December to 2.07% in January. Annual (year-over-year) inflation fell more modestly, from 2.73% (December) to 2.51% (January). Our measure of trend inflation fell from 2.65% (December) to 2.39% (January).

Monthly core CPI inflation rose sharply from 2.83% to 3.60% while annual inflation fell moderately from 2.65% to 2.51%. As we have previously discussed, both of these measures have important drawbacks: high volatility in the case of monthly inflation, sluggishness for annual inflation. Our trend measure, designed to address these shortcomings, rose from 2.26% to 2.71%.

Regular readers know that the FOMC focuses on (core) PCE inflation, not CPI inflation. However, CPI data is typically released two weeks earlier than the PCE data, and given the overlap in coverage, CPI inflation provides a useful, more timely information on the likely PCE inflation rate. The information lag has been exacerbated by the Federal government shutdown last fall: data for December is scheduled to be released late next week. To predict the soon-to-be-released PCE inflation rate, we regressed a measure of PCE inflation (for example, trend core PCE inflation) against its corresponding, contemporaneous CPI inflation rate. For months when PCE data has not been released, we use this regression to forecast PCE inflation.

Overall monthly PCE inflation for December is forecast to be 3.20%, higher than the observed value of 2.52% in November; this measure of inflation is then expected to fall to 2.08%. The annual PCE inflation rate is projected to fall from 2.77% in November to 2.63 in December and further fall to 2.14% in January. Our trend measure is seen to fall from 2.55% (November) to 2.47% (December) and subsequently to 2.28%.

Monthly core PCE inflation is expected to rise from 1.94% (November) to 2.69% (December) and then to 3.16% (January). The picture for annual core PCE inflation is better: November’s 2.79% rate is forecast to fall to 2.37% in December and further fall to 2.26% in January. Our trend measure of core PCE inflation is projected to fall from 2.39% in November to 2.11% in December before rising again to 2.45%.

Markets and most commentators expect that the FOMC will leave the fed funds rate unchanged at its next meeting. This week’s data helps explain why. The labor market is holding up quite well with reasonably strong job creation (particularly in the private sector) and the unemployment rate is fairly low. Meanwhile, inflation is stuck above the FOMC’s 2% target.