The Bureau of Labor Statistics (BLS) announced that the Consumer Price Index (CPI) for all items rose 0.5% over the month or 5.75% on an annualized basis. This is the largest increase since August of 2023. The year-over-year increase was 3.00%. Our preferred trend measure rose 4.12% on an annualized basis. As the graph below shows, all of the measures have been inching up over the past few months.
Removing food and energy from the index, the core measure, increased 5.49%, the highest reading since April of 2023. The year-over-year number increased 3.29% and the trend measure was up 3.85%.
No matter how one slices it, the inflation numbers are not moving in the right direction. The rise in prices was broad-based, the only major category that decreased over the month was apparel. Later this month, the FOMC’s preferred measure of inflation, core PCE, will be released. There’s a high correlation between CPI and PCE inflation, and it seems unlikely that this measure of inflation will near the committee’s 2% target.
Fed Chair Powell began his testimony to the House Financial Services Committee this morning and will likely have a tough time given the broad based spike in prices. Needless to say, this does not bode well for an easing of interest rates in the near term.
The BLS announced that the establishment survey revealed a 143,000 increase in employment in January, 111,000 of that came from private payrolls. Moreover, all of the private employment increase came from the service sector as the goods producing sector had a net of zero. November was revised up by 49,000 and December by 51,000.
Average hours worked in January fell to 34.1 hours. Apart from the pandemic, the last time it was 34.1 was back in April of 2010. With the 111,000 increase in private employment and the reduction in average hours of work, total hours worked also fell.
Average hourly earnings for private workers rose 0.5% over the month (5.9% on an annual basis). Using various inflation measures, real hourly earnings have been steadily rising over the past couple of years.
The household survey indicated that the labor force participation rate increased from 62.5% to 62.6% and the employment to population ratio increased from 60.0% to 60.1%. The unemployment rate fell from 4.08% to 4.01%.
An article in the New York Times suggested that the jobs report would be “confusing” due to massive revisions owing to an annual process that reconciles the differences between the establishment and household surveys. Our reading: not so much. There was no revision to the household survey employment numbers. While establishment survey employment was revised down some 610,000 as of December 2024, the level of employment was around 159 million. While 610,000 would be a massive change on a monthly basis, that’s not the right way to think about the revision since the revisions are spread over many months. A better way to think about the revision: the level of employment in December was revised down roughly 0.4%. The figure below shows substantial downward revisions in January and March 2024, and similarly large upward revisions for November and December.
On Tuesday, the BLS released the job openings and labor turnover summary (JOLTS). The job openings rate fell somewhat but hires and separations changed little.
On Thursday, the BLS released data on productivity and costs. Growth in productivity fell from 2.3% in 2024Q3 to 1.2% in 2024Q4. Most of this decline can be attributed to a fall in output growth (from 3.6% to 2.3%). Growth in hours worked also fell, from 1.3% to 1.0%.
The labor market, as always, has some ups and downs in the underlying components. Job growth was so-so and both the labor force participation rate and employment to population ratio rose. Average hourly earnings show strong growth. However, average hours of work and total hours fell as did productivity. These reports do not really alter the “wait and see” approach outlined by the FOMC after their recent meeting.
2024 ended on a strong note as the BEA announced that real GDP increased 2.4% on a seasonally adjusted annual rate, lower than the very strong previous two quarters, but still above the long term trend. Over the year, GDP increased 2.8% following a 2.9% increase in 2023.
Personal consumption expenditures led the way, increasing 4.2%. Investment went the opposite direction, declining 5.6%.
One useful way to look at this data is to decompose the growth in output into contributions by its constituent parts. By way of example, the contribution of consumption, 2.9%, is given by the growth rate of consumption (4.2% in 2024Q4) weighted by the share of consumption (69%). Comparing across the third and fourth quarters, one can see that the contribuiton of consumption rose, from 2.5 percentage points to 2.9 points while that of investment fell from 0.1 points to -1.0 points. At the same time, the contribution of exports went from 1.1 points in the third quarter to a drag of 0.1 points in the fourth; in contrast, imports were exerted a 1.7 point drag in the third quarter but contributed a positive 0.1 points in the fourth.
The PCE price index was released today and, much like the CPI released earlier this month, delivered mixed signals. Inflation as measured by the PCE price index jumped to its highest level since April of 2024, increasing 3.11% on a seasonally adjusted annualized basis. Removing the highly volatile food and energy categories, the increase was only 1.89%, the second consecutive month below the FOMC’s 2.0% target. Our preferred trend measure revealed a similar pattern, with the PCE trend rising 2.36% (highest since last April) but the PCE core measure fell to its lowest level since December of 2023, 2.17%.
The Department of Labor released weekly initial claims for unemployment, falling 16,000 to 207,000, indicating that the labor market continues a strong performance.
Are we there yet?
We all know that the Fed looks at core PCE inflation. Less clear is whether they look at the month-to-month inflation rate, or year-over-year rate. Over the past three months, our trend measure has moved down towards the Fed’s 2% target, but: the same could be said of June to August of 2024, and our trend measure is still above target. There is still (some) work to be done on the inflation front. Fortunately, the real side of the economy continues its strong showing. Earlier this week the FOMC decided to keep rates as they were:
Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.
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.
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?
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.
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.
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.
The BLS announced that payroll employment increased 254,000 in September (plus 72,000 in upward revisions over the previous two months), solidly beating the “forecasts” that hovered around 150,000. Before the report many had talked about the slowing of the labor market, such as this from CNBC:
September’s jobs picture is expected to look a lot like August’s — a gradual slowdown in hiring from earlier this year, a modest increase in wages and a labor market that is looking a lot like many policymakers had hoped it would.
Well, looks like policy makers didn’t get what they hoped for! In fact it looks more like a gradual increase in hiring over the past four months. The private sector led the charge, increasing 223,000, the second highest reading since May of 2023.
Private sector service jobs increased 202,000 with health services and social assistance rising 71,700 and leisure and hospitality jumping up 78,000, the highest since January, 2023. Declines were seen in manufacturing of both durable goods, down 3,000 and non-durable goods down 4,000.
Average hours of work fell from 34.3 to 34.2, so that total hours of work fell 1.5%. Average hourly earnings climbed to $35.36 from $35.23. The growth in hourly earnings continues to outpace CPI inflation, meaning real wages are rising.
The household survey shows an employment increase of 430,000 and the number of unemployed persons fell 281,000. The labor force increased 150,000. The unemployment rate declined from 4.22% to 4.05%. Curiously, in its press release, the Bureau of Labor Statistics said that the unemployment rate was little changed between August and September.
Earlier this week, the Job Openings and Labor Turnover Survey (JOLTS) was released and showed little change in job openings, hires and separations. There are still more job openings than the number of unemployed persons.
Overall, the labor market continues to defy the press who seem to be constantly trying to show the economy is softening. No signs here. What will this do to the outlook for the Fed’s next steps? The labor market is also at odds with the Fed, at least in terms of their last statement,
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.
Looking at the very first graph on this post, one can see that job gains have been increasing over the past several months and the unemployment rate actually fell this month. With the strong GDP numbers and this strong labor market outcome it may shift the thinking that inflation pressures could/might/will be increasing. Was the recent 50bp cut too much too soon?
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.”
