The BLS announced that inflation as measured by the consumer price index fell to 2.38% on an annualized basis, down from 3.5% in June. The year-over-year number climbed to 2.73%, the highest reading since February, and an increase from June’s 2.67%. The annualized core CPI jumped from 2.77% to 3.74%. Our preferred trend measure for the CPI fell slightly from the previous month, from 2.44% to 2.42%. And our core trend measure rose to 2.95% from 2.45%.
The Fed’s preferred measure is the Personal Consumption Expenditure price level and will be released on August 29, providing more information on the direction of prices in the economy. While the two measures, CPI and PCE, do not move in lock-step over longer periods of time they tend to move in the same direction. If PCE inflation for July is similarly higher than in June (as seems likely given CPI inflation), it will be difficult for those FOMC members advocating for a rate cut to make a compelling case.
There were several data releases as well as a Fed meeting this week. The Jobs Openings and Labor Turnover Survey (JOLTS) was released on Tuesday. The release reported that there was little change in job openings, hires and total separations. The graph below shows that there are still slightly more jobs available, 7,437,000 than unemployed persons, 7,015,000.
Another useful statistic is the rate of job openings, determined by the number of openings divided by the number employed plus openings, that is, filled and unfilled jobs. This number has been steady over the past year once the outsized rates in the post-pandemic period eased. The other rates in the graph are found by dividing the level by total employment. The quit and layoff rates have been flat in 2025.
On Wednesday the BEA announced that real GDP increased 3.0% on an annulaized basis in the second quarter. Consumption increased 1.4%, investment fell 15.6% and government consumption and investment increased 0.4%. Exports and imports declined, 1.8% and 30.3%, respectively.
A different way of thinking through the above National Income and Product Accounts (NIPA) data is in terms of contributions to output growth. The 3% growth in output can, then, be decomposed as: 1 percentage point due to consumption, 0.1 percentage points due to government spending and 5.1 points due to imports. Investment exerted a 3 percentage point drag on output growth while exports contributed -0.2 percentage points. Of particular importance is the 30.3% decline in imports following a 37.9% increase in Q1. A reasonable interpretation of this data is that Trump’s promised tariffs boosted imports in the first quarter (as businesses imported goods ahead of the tariffs). The large negative growth of imports in the second quarter then reflects an “unwinding” of the first quarter hike in imports.
On Thursday of this week the BEA announced the PCE price index from the Personal Income and Outlays release. The release showed an increase in the PCE price index of 3.42% on annualized basis after rising 2.03% in May. Our preferred trend measure increased to 2.66% from 2.28%. The PCE core measure cruised past the 3% mark to 3.12%, about half a percentage point higher than the previous month. Our trend measure of PCE core inflation rose from 2.69% to 2.83%. These PCE inflation numbers were largely foreshadowed by the CPI data released over 2 weeks ago.
Finally, at the end of the week, the BLS announced that payroll employment increased 73,000. Even worse, there were also downward revisions totaling 258,000; 125,000 in May and 133,000 in June. There was one small positive bit in the report, average hours of work increased to 34.3 from 34.2.
The goods producing sector shed 13,000 jobs for the third consecutive month. The service sector, however, saw continued growth, increasing 96,000. Interestingly, the diffusion index (indicating the fraction of firms increasing increasing or not changing employment) rose to 51.2, meaning that more firms increased employment than decreased it.
The household survey also showed considerable weakness, employment fell 260,000 and the labor force participation rate declined to 62.2 from 62.3. The unemployment rate inched up slightly from 4.12% to 4.25%.
Policy Outlook
The FOMC now finds itself in an unenviable position of seeing inflation well above target and a weakening real side of the economy. It may seem strange to describe the real side as “weak” when output recorded a 3.0% increase. The problem is the effect of tariffs on imports. We don’t want to make too much of the decline in exports, but will be watching to see if U.S. trade partners respond to U.S. tariffs by pulling back on their imports of U.S. goods and services – which will be reflected in lower U.S. exports. The -15.6% growth in investment similarly looks bad except that it comes on the heels of a very robust 23.8% growth rate in the first quarter.
On the real side, labor market developments are starting to turn down. We were comforted by the solid job gains in April and May, but the revised data suggests a more anemic job market. While the 73,000 jobs added in June look better than the revised numbers for April and May, that’s not saying much. The weak labor market would seem the best case for those pushing for a Fed funds rate cut.
On the other hand, inflation continues to run higher than the FOMC’s 2% target and is now moving in the wrong direction (that is, away from 2%). Some policymakers are arguing that the effect of tariffs will be a level shift in prices that will have no lasting effects on inflation. While this is plausible, this case would be stronger if there were evidence in its favor. We’ve yet to see such evidence. Remember that policymakers also argued that the effect of the pandemic would similarly be a left shift in prices with no lasting effects on inflation. As Montgomery Scott famously said, “Fool me once, shame on you; fool me twice, shame on me.”
Over the past few years, the FOMC has tried to engineer a so-called soft landing in which inflation is brought under control without causing a recession. The Committee now faces rising inflation and a potential recession. Since the Fed only has one instrument (the Fed funds rate), it cannot address the two targets, inflation and unemployment. Job one for monetary policymakers is to keep inflation in check. Let fiscal policymakers handle the real side.
In its advance estimate, the BEA announced that Q1 GDP declined 0.3% on an annualized basis. Total output (GDP) is the sum of consumption, investment, government spending and net exports (exports – imports). Given the turmoil from Washington, DC, investment and imports saw outsized gains, 21.9% and 41.3%, respectively. But one needs to be careful here in interpreting these numbers. Imports do not add or subtract from GDP. Those who claim that imports are a drag on GDP are simply wrong. When someone imports a $1,000 TV (imports go up but enter the GDP calculation with a negative sign), someone buys that TV so consumption goes up by that same amount. It seems that most journalists reporting on this make the mistake that it was, in fact, imports driving down GDP. Here is a nice explanation that goes deeper.
Consumption grew 1.8% and government consumption fell 1.4%.
A different way to view the GDP numbers is in terms of contributions of the major components to output growth (that is, weighting the growth rates of the various components by their shares of GDP). Recall that output growth was -0.28% (annualized). Investment contributed 4.01 percentage points to output growth while consumption added 1.24 points. Exports chipped in a meager 0.2 percentage points. Negative contributions were recorded by government spending (-0.25 percentage points) and -6.48 points due to the surge in imports.
The BEA also released the Personal Income and Outlays report that showed an annualized decline of 0.53% in the personal consumption expenditures price index in March (down from 5.47% in February) while our preferred trend measure came in at 2.46% (a drop from February’s 3.96%). On a year-over-year basis, PCE inflation slipped from 2.69% to 2.29%. The core PCE inflation remained positive at 0.33%, a plunge from 6.14% in the previous month); our trend measure dropped from 4.03% to 2.80%; and the year-over-year rate dipped from 2.96% to 2.65%. Interestingly, these declines in PCE inflation were largely foreshadowed by similar declines in CPI inflation (released two weeks ago).
The large spike in imports could plausibly be caused by buying before the tariffs kick in and so would likely be transitory. The same might be said for investment as the largest component was equipment investment, rising 22.5% on an annualized basis. With the large effect from imports driving the decline in GDP and the fact that inflation remains above the Fed’s target presents a case for the Fed to keep the fed funds rate at its current level.
The BLS announced that the CPI fell 0.60% on an annualized basis in March, down from 2.62% in February. The year-over-year inflation fell from 2.81% (February) to 2.40% (March) while our trend measure dropped from 3.62% to 2.21%.
Inflation as measured by core CPI inflation (excluding food and energy) similarly fell. The annualized month-over-month rate tumbled from 3.49% to 2.55% while the year-over-year rate dipped from 3.14% to 2.81%. Our trend measure of core CPI inflation dropped even more, from 3.49% to 2.55%.
What does the CPI portend for the PCE deflator (to be released in a couple of weeks) and so monetary policy? Frankly, it’s hard to tell. While CPI and PCE inflation move together when looking at long periods of time, at much shorter horizons there’s a much looser link. For example, February’s CPI inflation fell relative to January, yet PCE inflation rose.
The good news for the policy outlook is that, at the time we are writing, President Trump has put a 90 day pause on his plan to raise tariffs on most countries. The one exception is China: both countries have raised their bilateral tariffs to prohibitively high values.
The BLS announced that payroll employment rose 228,000 in March after January and February’s lackluster performance. The private sector added the bulk of the jobs, 209,000, with the government sector adding 19,000. The federal government, however, lost 4,000 jobs in March having already lost 11,000 in February.
The manufacturing sector continues to struggle, adding only 1,000 jobs in March and only 4,000 jobs over the past three months. The service sector, on the other hand, grew 197,000.
Average weekly hours remained at 34.2 and average hourly earnings rose from $35.91 to $36.00.
The household survey showed an employment increase of 201,000. The number of unemployed persons increased by 31,000. The labor force participation rate increased from 62.4 to 62.5. The unemployment rate ticked up very slightly, from 4.14% to 4.15%. Note that the unemployment rate as well as those marginally attached are still near their all time lows.
The Jobs Openings and Labor Turnover Survey (JOLTS) was released on April 1. Overall, there was very little change in any of the metrics: openings, hires and separations. As of March, there are still slightly more job openings that unemployed individuals.
On April 2, 2025, President Trump announced drastic increases in U.S. tariffs. While uncertainty over these tariffs may have affected March job creation, the effects of the actual tariffs will only be reflected in the data starting with April data. The full effects of the tariffs will depend on things like: (1) Whether U.S. trade partners respond with their own tariffs; (2) Whether U.S. trade partners can come to an agreement to end the tariff war; and (3) How quickly U.S. firms can adapt their supply chains to the new tariff environment, including reshoring manufacturing jobs. A murky monetary policy outlook is even murkier.
The BLS announced that the CPI rose 2.62% on an annualized basis, the lowest reading since August, 2024. Year over year inflation came in at 2.81%. Our preferred trend measure of inflation was 3.62%. The report offers some good news given the CPI spike in January. The biggest decline came from energy commodities (gasoline and fuel oil), down 10.1% on an annualized basis, down 3.17% year over year; however, our trend measure rose 8.53% due to outsized increases in January (13.8%) and February (17.9%). Energy prices are extremely volatile as can be seen in the magnitude of the scale in the energy graph.
Given the volatility mentioned above, policy makers often remove food (including the price of eggs) and energy from the index, namely, core CPI. The monthly core number fell from 5.49% to 2.75% on an annualized basis, and from 3.29% to 3.14% year over year. Our trend measure fell from 5.85% to 3.49%.
While there is a small sigh of relief given January’s spike in inflation, the core numbers are still solidly above the Fed’s 2% target. Moreover, these numbers from February do not reflect the recent tariff measures put in place and may take many months before we see any price effects. Looking at future inflation expectations, however, reveals a marked increase in prices. The breakeven inflation rate represents a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 5 years, on average.
Meeting next week, the Fed will almost surely stay the course with no change in rates as they wait to see how current policies play out over the next few months.
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.
