Month: June 2026

By Paul Gomme and Peter Rupert

The Bureau of Economic Analysis has released Personal Consumption Expenditure data for May. On an annual basis, overall PCE inflation rose from 5.03% (April) to 5.53% (May). The year-over-year inflation rate also increased, from 3.80% to 4.07%. Our measure of trend PCE inflation is similarly up, from 5.29% to 5.37%. The Fed’s stated target is 2% inflation.

The Fed’s preferred measure, core PCE inflation shot up from 3.05% to 3.91% (month-over-month, annualized), or from 3.32% to 3.41% (year-over-year). Our measure of trend: 3.75%, up from 3.67%.

The new FOMC Chair, Kevin Warsh, has his job cut out for him. To be sure, after inflation rose in the post-pandemic environment, the Jerome Powell-led Fed failed to bring inflation down to its 2% target. Developments in the US-Iran war have, no doubt, contributed to the increase in overall PCE inflation. However, core PCE inflation — which strips out the “volatile” food and energy components — is far less susceptible to these developments.

To understand the problem facing Warsh, suppose that there are two types of central bankers: hawks who are tough on inflation, and doves who are not. It’s cheap for central bankers to go around telling everyone that they’re a hawk. Such speeches are largely uninformative. The implication is that when there is a change in leadership, the public is quite uncertain whether the new leader is a hawk or a dove. (We’re ignoring the unlikely case in which the central banker wants to be known as a dove.) How does a central banker gain a reputation for being a hawk? By making tough decisions that a dove would not. In the current environment, a dove would be prone to lowering the Fed funds rate; a hawk would raise it. Leaving the rate unchanged may well be interpreted as being dove-like. Importantly, once a central banker comes to be viewed as a dove, it is very difficult to rehabilitate that reputation: it would requite a prolonged period of hawk-like actions. Assuming that Warsh is committed to a 2% inflation target, he has a tough choice between: (a) immediately behaving like a hawk, raising the Fed funds rate; or (b) later acting like a hawk and for a much longer period of time. Acting later will be economically more disruptive than acting preemptively. Good luck Mr. Warsh.

By Paul Gomme and Peter Rupert

Squinting just the right way, one may see some good news in the recent CPI report. To be sure, inflation is running far too high. On an annualized month-over-month basis, inflation was 5.82% in May — but that’s down from 7.96% in April. Our measure of trend inflation was 6.14% in May compared to 6.30% in April. That the year-over-year inflation rate rose from 3.78% to 4.17% chiefly reflects the burst in inflation that started with the US-Iran war.

The story is much the same with core CPI (that is, after stripping out food and energy prices). The month-over-month rate fell from an annualized 4.61% (April) to 2.53% (May); our measure of trend also fell from 3.26% to 3.01%. Again, the year-over-year measure rose, from 2.74% to 2.82%.

What all of this means for monetary policy is anyone’s guess. New Fed Chair Kevin Warsh is said to prefer trimmed mean measures of inflation. In brief, trimmed means throw out those prices with the highest and lowest changes in any given month. We suppose Warsh means trimmed PCE inflation, but maybe he means trimmed CPI inflation. Will the rest of the FOMC go along with Warsh? The danger in switching from core PCE to trimmed mean PCE inflation is that the Fed may be seen as acting opportunistically, choosing a measure of inflation that fits preconceived notions regarding the future trajectory of the Fed funds rate.

Employment report

The BLS announced that payroll employment increased 172,000, again crushing expectations. The private sector added 120,000 and the government also showed an increase of 52,000.

It has not been a very good year for private forecasters when it comes to employment…no one said it was easy!

	Employment Forecast	Actual
January	55,000	160,000
February	50,000	-156,000
March	59,000	202,000
April	62,000	177,000
May	88,000	172,000

Average weekly hours remained at 34.3 and average hourly earnings rose from $37.41 to $37.53.

The household survey showed an increase of 149,000 and the number of unemployed persons fell by 66,000. The unemployment rate fell slightly, from 4.34% to 4.30%.

Overall, the labor market continues to perform above “expectations” and will make it difficult for policy makers to point to a weak economy.