Author: peter.c.rupert

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.

by paul gomme and peter rupert

This morning, the BEA released updated third quarter GDP and Personal Income and Outlays. Real GDP growth was revised up from 4.3% to 4.4% for the third quarter of 2025. The largest contributor to the GDP growth came from consumer spending, rising 3.5%, that contributed 2.34 percentage points to the overall growth. Investment showed no change, however, both non-residential and residential structures declined sharply, 5.0% and 7.1%, respectively, while equipment and intellectual property products increased 5.2% and 5.6%, respectively.

The BEA is clearly working hard to get back onto schedule, releasing Personal Income data for October and November 2025. This release is the source for PCE (personal consumption expenditure) price data. Starting with the overall PCE inflation, the annualized month-over-month inflation rate for November was 2.52%, up from 1.93% in October, but down from3.18% in September. The annual, or 12 month-over-12 month, inflation rate was 2.77% in November, little changed from September (2.74%) but up slightly from October (2.68%). Our measure of trend inflation was 2.55% in November, almost the same as in October (2.56%) and down from September (2.88%).

Turning to core PCE inflation (that is, excluding food and energy), the annualized monthly inflation rate was 1.94% in November, down from 2.30% in September and 2.52% in October. There was not much change in the annual inflatino rate: it was 2.79% in November compared to 2.83% in September and 2.75 in October. Our trend measure for November was down to 2.39% compared to 2.67% in September and 2.62% in October).

December PCE data is scheduled for release on February 20. The release schedule is scheduled to catch up to its previous pace (just under a one month lag) only by April 30. These continued lags are most unfortunate since the FOMC’s preferred measure of inflation is based on core PCE. In a previous post on CPI inflation, we discussed running a regression of PCE inflation against the contemporaneous measure of CPI inflation, then using the more timely CPI inflation to predict PCE inflation. Overall PCE inflation is predicted to rise on a month-over-month basis (from 2.52 in November to 3.29% in December), fall on an annual basis (2.36 in December compared to 2.72% in November), and our measure of trend is predicted to fall from 2.58% to 2.44%. Predictions for core PCE inflation show similar patterns: the monthly rate rising from 1.94% to 2.75%; the annual falling from 2.79% to 2.37%; and our trend measure falling to 2.11% from 2.39%.

A strong case can be made for keeping the Fed funds rate unchanged. Output growth is very strong and inflation is still above the FOMC’s 2% target. While job creation has weakened, the unemployment rate is quite low by historic standards.

By Paul gomme and peter rupert

The BEA announced that real GDP for the 3rd quarter showed strong growth, rising 4.3% on a seasonally adjusted annualized basis. This is the highest growth since Q3 of 2023. Consumption growth led the charge, increasing 3.5%.

While consumption has been strong, investment has not. Outside of the large swings, likely due to tariff announcements, investment has been dismal over the past year, declining three times in the past five quarters.

Policy Implications

Members of the FOMC wishing to hold interest rates fixed (or even raise them) will, no doubt, point to the high real output and consumption growth. Those advocating lower rates will emphasize the fall in investment as well as the weak jobs growth between September and November and the increase in the unemployment rate. Much rides on the core PCE inflation rate. Data for November was supposed to be released on December 19, but has been delayed; the next (scheduled) release is for December 2025 (not November) on January 29, 2026. That will not leave much time to digest the incoming inflation data since the next FOMC meeting is January 30-31. We will see where the FOMC comes down on the potential “risks” to the economy in terms of inflation and the real side of the economy.

By Paul Gomme and Peter Rupert

The BEA, back up and running, announced that PCE inflation was 3.27% (on an annualized basis) in September, up from 3.14% in August. The year over year number also increased, from 2.74% in August to 2.79% in September. Our preferred trend measure also moved up, from 2.70% in August to 2.89% in September.

Excluding food and energy, PCEX, actually fell slightly, from 2.68% to 2.40%. The year over year number also fell, from 2.90% to 2.83%. Our calculated trend measure fell from 2.82% to 2.68%.

A Longer Perspective

Recall that in the pandemic period, the Fed fucked up badly on the inflation front. PCE/PCEX inflation started falling starting in mid-2022. Breaking the PCE price index into its components, goods and services, our chart shows that the bulk of the progress on the PCE/PCEX inflation front came from its goods component which declined rapidly in late 2022, and has exhibited deflation (negative inflation) for some time (so much for the Keynesian adage that prices are downward sticky). In contrast, PCE services inflation was slow to come down and has run persistently above the Fed’s 2% target for PCEX inflation.

This breakdown between goods and services has gained traction among those trying to parse out, in real time, the effects of the Trump tariffs on prices and inflation. The idea is that the effects of these tariffs will be seen first in goods prices. Through 2025, our charts show a gradual rise in PCE goods inflation; the large increase in the monthly goods inflation rate in September has pushed our measure of trend above the Fed’s 2% target. This behavior of PCE goods inflation is consistent with the tariffs story. That PCE/PCEX inflation has been flat (or mildly rising) in 2025 is now due to the moderating effect of somewhat lower PCE services inflation (albeit, still above the magic 2% target).

Once again the Fed is in a bit of a sticky position. Inflation is not moving in the right direction. The real side of the economy is chugging right along, see this bullish report from the Financial Times. The calls for another rate cut at the meeting next week, in our view, are premature.

by paul gomme and peter rupert

The BLS is back! Employment rose 119,000 in September, neither high enough nor low enough to change anyone’s mind about the state of the economy, although it was more than twice as high as the Dow Jones consensus of 50,000. In August employment fell by 4,000 after a downward revision.

The private sector added 97,000 jobs and the government sector added back 22,000 jobs after shedding 22,000 jobs in August. The service sector added the bulk of jobs, growing 87,000.

The unemployment rate ticked up from 4.32% to 4.40% but still remains relatively low but has increased substantially for African Americans and spiked for those without a high school degree.

At the end of the day, the report will most likely not change anyone’s opinion about their view of the current stance of the economy or monetary policy.

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%.