Author: peter.c.rupert

The BLS announced that the CPI rose 4.82% on an annualized, seasonally adjusted basis, the highest reading since last February, and an increase of a full percentage point compared to November. The year over year reading increased from 2.73% to 2.90% and our preferred trend measure increased from 2.81% to 3.48%. The surge, however, came largely from energy commodities (fuel oil and gasoline) rising 4.3% over the month, 66.5% annualized!! The extreme volatility of energy and food is the main reason the BLS also reports the CPI ex food and energy, likely a better measure of underlying inflation.

The CPI core measure (ex food and energy) plunged from an annualized 3.76% in November to 2.73% in December. The year over year number fell from 3.30% to 3.25% and our trend measure fell from 3.37% to 3.16%.

The following graph shows the extreme volatility of energy prices, often rising or falling 50% or more in a month. Food prices are also volatile, but no where near that of energy.

PCE inflation for December will be available in just over two weeks. Given the overlap in the goods and services in the CPI and PCE deflator, the CPI provides a useful signal of the likely direction for PCE inflation. Clearly, the signal from this CPI report is mixed: Overall CPI inflation rose between November and December while core CPI inflation fell. Since the policymakers on the FOMC focus on core inflation measures, perhaps the CPI report is good news: we may be in for a moderate decline in core PCE inflation. Stay tuned.

by paul gomme and peter rupert

The BLS announced that payroll employment increased 227,000 in November. In addition, October’s estimate was revised up 24,000 and September revised up 32,000. The private sector rose 194,000 after actually shrinking 2,000 in October.

The private service sector gained 160,00, led by the health care and social assistance sector, increasing 72,300. The largest sectoral loss was in retail trade, shedding 28,000 jobs and has had declining employment in 3 of the last 6 months.

Average weekly hours of work rose from 34.2 to 34.3, meaning that total hours of work increased 0.4%. Average hourly earnings increased 0.3%, from $35.48 to $35.61.

The household survey, on the other hand, painted a much weaker picture. By this measure, employment fell 355,000 and the labor force declined by 193,000, leading to a decline in the participation rate to 62.5 from 62.6. The unemployment rate ticked up slightly from 4.15% to 4.25%.

Overall, this was a solid jobs report. The strength of the labor market leaves the FOMC in a bit of a pickle. Markets have priced in a 25 bp cut this month, perhaps encouraged by recent remarks by Fed Governor Christopher Waller. Yet, the real economy is strong and inflation has been inching up over the last several months. Having built expectations of a rate cut, is the FOMC willing to disappoint markets in light of the new data?

by paul gomme and peter rupert

The BEA announced that the personal consumption expenditures price index (PCE) for October increased 2.89% on an annualized basis (2.18% in September) , the highest reading since April of this year. The year over year number rose 2.31% (2.18% in September) and our trend measure rose 2.23% (1.91% in September). The increase largely came from the price index for services, rising 4.60% on an annualized basis. The year over year increase was 3.88% and our measure of trend was up 3.78%. Goods prices, on the hand, fell 0.73% and have been declining since May of 2024. Year over year, goods prices fell 0.98% and our trend measure fell 1.05%.

The Fed’s preferred measure, PCE ex food and energy (PCEX) rose 3.32% (3.18% in September)on an annualized basis, 2.80% year over year (2.65% in September) and our trend measure came in at 2.81% (2.56% in September).

The bottom line is that the inflation numbers are drifting away from the Fed’s 2% target. Staying ahead of the curve should be job one for the Fed. While many are anticipating another 25 bp cut at the next meeting, it might be time for a pause.

By Paul Gomme and Peter Rupert

The Bureau of Labor Statistics announced that the CPI rose 0.2% on a seasonally adjusted basis in October. Our own calculation using the level of the price index, shows an increase of 0.24% over the month or 2.97% on an annualized basis, up from an annualized 2.18% in September. The year over year increase was 2.58% in October, increasing from the 2.41% reading in September. Our preferred annualized trend measure also increased, from 1.98% in September to 2.31% in October.

Removing food and energy from the index shows a slight drop in the annualized number, from 3.81% in September to 3.42% in October. The year over year saw almost no change, 3.26% to 3.30%. Our trend measure rose from 3.06% to 3.18%. More importantly, our trend measure has been increasing every month since June.

The main reason that “core” inflation is used by the Fed and others is due to the fact that food and energy prices are very volatile and so are removed from the index. However, food and energy are large parts of the expenditure of households. So when households are looking at the prices of things they buy, obviously, food and energy play a large role. Food is roughly 13% of the total expenditures in an average urban budget and energy is a bit over 6%. The largest expenditure category is shelter at about 37%. While one can pick and choose what to take out, many of the measures have also shown increases, but others have not. For example, take food prices. The price index shot up quickly during/after Covid but the growth of prices has come down but have started to rise more recently.

The CPI for services also increased during and after Covid and have since come down but again have started to creep up.

The bottom line is that inflation has come down over the past year or so, but many indicators are showing signs of increasing prices. So, it seems surprising that some Fed officials, namely Kashkari stated that inflation is moving in the right direction and Logan said that “progress on inflation has been broad based,” although Logan was speaking about the PCE, see our commentary about the PCE here.

By Paul Gomme and Peter Rupert

The BLS announced that the CPI increased 2.18% on annualized basis (the BLS reported 0.2% on a monthly basis) in September after increasing 2.27% in August. The year over year measures came in at 2.41% for September after a 2.59% increase in August. While this is apparently good news, in earlier posts we have remarked that the monthly number is too volatile and the year over year number does not respond very quickly to changes in trend. Unfortunately, our preferred trend measure has increased to 1.98% in September after increasing 1.87% in August, thus moving in the wrong direction compared to the monthly and year over year measures. It should be noted, however, that our measure is just below the Fed’s 2% target.

The CPI saw big declines in energy, falling 1.9% over the month and 6.8% year over year. Fuel oil fell 6.0% over the month and 22.4% year over year. It is well known that both food and energy prices are quite volatile so that looking at core (excluding food and energy) may be a better indicator. While the year over year number changed little, both the monthly and trend measures saw a significant bounce, rising to 3.81% (was 3.42% in August) and 3.05% (was 2.68% in August), respectively.

Perhaps an easier way to see the changes is in the bar graph below where it becomes more evident for our trend measure that the last few months have been going in the wrong direction.

Another piece of data came out this morning: initial jobless claims popped up 258,000, its highest reading since August of 2023. This increase in jobless claims will make Fed decision-making a bit more problematic as they balance inflation vs. the labor market.

by paul gomme and peter rupert

The Bureau of Economic Analysis announced that the price index for personal consumption expenditures (PCE) increased 1.09%, on an annualized basis, in August following a 1.85% increase in July. The year over year reading came in at 2.2% following 2.7% in July. Our preferred measure of “trend” inflation continues to fall and came in at 1.65% after a 1.92% in July.

The Fed tends to put more weight on the core PCE, the PCE excluding food and energy (PCEX). Over the month the BEA shows an annualized 1.58% increase. The year over year reading came in at 2.68%, slightly higher than the 2.65% reading in July. Our trend measure for August is 2.12% following a 2.39% reading for July.

The two main components of the PCE price index, goods and services, show much different behavior. The annualized goods component for August was -1.82% and the services component was 2.46%. This has been roughly the pattern for all the year over year and trend measures over the past few months.

Fed Governor Christopher Waller was recently interviewed on CNBC, and was quoted as saying that PCE price inflation for August would be “very low” and that “inflation is softening much faster than I thought”. Our measure of trend core PCE inflation is still above the FOMC’s 2% target. Granted, monetary policy is said to operate with long and variable lags. Still, for the purposes of Fed credibility and keeping inflation expectations in check, it might have been a good idea to have waited until inflation was well and truly contained. Indeed, the FOMC commented in the July 31 statement:

The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.

Looking at the PCEX graph above all of the measures were moving sustainably to the 2% target starting in 2023, however, there was a bounce in those measures in late 2023 and early 2024. Moreover, the real side of the economy is strong. While concern has been expressed regarding the unemployment rate, by historic standards it’s still rather low. It strikes us as premature to declare “mission accomplished.”

By Paul Gomme and Peter Rupert

The Bureau of Economic Analysis (BEA) announced that the personal consumption expenditures (PCE) price index increased 0.2% over the month. Using the price index numbers (found here in Table 5) of 123.378 for July and 123.187 for June, the annualized increase is 1.88%, up somewhat from the June reading of 0.73%. The year over year measure increased 2.50% in July after increasing 2.47% in June. Our trend measure increased 1.81% in July and 1.78% in June.

The Fed’s preferred measure, the PCE less food and energy (core PCE) in July increased 1.95% on an annualized basis, down slightly from the June reading of 1.97%. Our trend measure also saw a decline from June, 2.28% from 2.44%.

Inflation pressures have moderated and our preferred trend measure of core PCE inflation has been falling over the past four months. At the same time, real Personal Consumption Expenditures increased 4.62% on an annualized basis in July compared to a 3.20% increase in June. The bottom line is that inflation is now close to the Fed’s 2.0% target with seemingly no big effect on the real side of the economy. We don’t see anything in this report that should change the outlook for an upcoming rate cut.