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.
