Author: Paul Gomme

All Quiet on the CPI Inflation Front

Posted on by Paul Gomme

The BLS’s announcement of the May CPI showed little change in the inflation rate. On a year-over-year basis, the CPI inflation rate ticked up from 2.33% in April to 2.38% in May. However, the annualized monthly inflation rate fell from 2.68% to 0.97%. Our measure of trend CPI inflation fell from 2.37% to 1.91%.

The situation was largely similar with regards to core CPI (excluding food and energy) inflation. The year-over-year measure barely changed, from 2.78% to 2.77%; the montly rate fell from 2.88% to 1.57%; and our trend measure dropped from 2.66% to 2.30%.

Fed watchers know that the FOMC focuses on core PCE inflation, not CPI inflation. That said, there’s considerable overlap in these two price level measures, and in general the two measures of inflation move together. Based on the CPI report, it seems unlikely that core PCE inflation will rise markedly. That inflation remains somewhat subdued and the real economy has not shown any real signs of slipping, it appears unlikely that the Fed will make any interest rate movements soon.

May Jobs Report

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The Bureau of Labor Statistics (BLS) reported another month of solid job gains for the U.S. economy. According to the Establishment Survey, the U.S. added 139 thousand new jobs. Oddly, the Household Survey recorded a loss of 696 thousand jobs. Historically, it’s not unusual for these two surveys to give much different readings on the job situation.

The government sector lost around a thousand jobs owing to 22 thousand fewer jobs at the federal level.

The goods sector dropped 5 thousand jobs with the manufacturing component falling 8 thousand. The service sector added 145 thousand.

While the BLS report stated that the unemployment rate was unchanged at 4.2%, the unemployment rate actually ticked up slightly, from 4.19% in April to 4.24% in May. Moreover, it continues to trend up from the extremely low rates in 2022-2023. Note that the unemployment rate is still quite low compared to its long term average.

The Job Openings and Labor Turnover Summary was released on June 3 and showed that the number of job openings was little changed at 7.4 million. There are roughly the same number of job openings as unemployed person.

April PCE Inflation

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Mostly good news regarding PCE (Personal Consumption Expenditure) inflation. While the annualized monthly core PCE inflation rate rose from 1.3% (March) to 1.4% (April), this rate is nonetheless below the Fed’s 2% target. Further, the annual core PCE inflation rate slipped from 2.67% to 2.52%. And our measure of trend core PCE inflation dropped from 2.94% to 2.43%.

The picture is much the same for overall PCE inflation: The annualized monthly rate rose from 0.14% to 1.21% (again, below the Fed’s 2% target); the annual rate fell from 2.31% to 2.15%; and our measure of trend dropped from 2.59% to 2.13%.

The report indicated that real disposable personal income ticked up to its highest level since January, 2024.

We won’t prognosticate on the likely course of monetary policy since Fed Chairman Powell has already said that the FOMC will wait until the data indicates that the committee should change its policy rate. Chairman Powell also foresees stagflation for the US: a combination of higher inflation and a deteriorating real side of the economy.

April CPI Inflation

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Looking at the annualized monthly CPI inflation rate, March looks like an outlier: April inflation is up (again). The overall CPI rose from -0.6% in March to 2.68% in April; excluding the volatile food and energy components, core CPI inflation popped up from 0.68% to 2.88%. Nonetheless, the annual inflation rate fell slightly from 2.41% to 2.33% (overall CPI) or from 2.81% to 2.78% (core CPI). The decline in the annual inflation rate reflects the observaton that the monthly inflation rate for April 2024 exceeded that for April 2025.

Our trend measures of CPI inflation also rose: from 2.21% in March to 2.37% in April for overall CPI inflation, and from 2.55% to 2.66% for core CPI inflation. Regular readers will remember that our trend measure of inflation sees through the blips in the monthly inflation rate while also being more responsive to underlying changes in trend than the annual inflation rate.

We pay attention to CPI inflation because it tends to move together with PCE inflation (the Fed’s preferred measure) which will be released in a couple of weeks. The tick up in April’s CPI inflation suggests that we may see a similar increase in April’s PCE inflation. The prospects for the FOMC cutting interest rates remains dim.

April Employment Report

Posted on by Paul Gomme

April saw solid job gains of 177 thousand according to today’s Employment Report from the BLS. While employment gains in April were lower than the revised figures for March (185 thousand, revised down from 228 thousand), April’s job gains easily exceeded those over the past 12 months (152 thousand).

While the government sector added 10 thousand jobs in April, the federal government shed 9 thousand jobs. In fact, in each of the past 3 months, federal govenment employment has fallen, presumably reflecting the efforts of DOGE to reduce the size of the federal government workforce. However, as noted in the BLS’s press release, employees on paid leave or receiving severance pay are considered employed in the establishment survey.

The household survey portion of the employment report showed a small uptick in the unemployment rate, from 4.15% in March to 4.19% in Aprl. The unemployment rate has varied in a fairly narrow band, between 4 and 4.2% since the middle of last year.

In Aprl, average hourly earnings rose 6 cents, to $36.06. However, workers ought to care about the goods and services that their wages garner — that is, their real wage. The figure below shows that real average hourly earnings have been increasing over the past couple of years. How much the real wage has gone up depends on the measure of prices, with flatter real wage growth when measured using either the CPI or core CPI, and somewhat faster real wage growth using the PCE or core PCE deflator.

Many economists are predicting a severe recession if Trump carries through with his planned tariffs. Thus far, we aren’t seeing these effects in the labor market. Nor does the Chauvet and Piger measure show any threat.

Oopsie: PCE inflation pops up

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CPI inflation for February (released a couple of weeks ago) brought the prospect of lower PCE defaltor inflation. It didn’t happen. On a year-over-year basis, PCE inflation barely changed, increasing from 2.52% (January) to 2.54% (February). While the annualized month-over-month rate fell, from 4.12% to 4.01%, our measure of trend rose from 3.06% to 3.38%.

Similarly, core PCE inflation (that is, excluding food and energy) rose in February: the monthly rate from 3.64% (January) to 4.47% (February); the annual rate from 2.66% to 2.79%. Our measure of trend core PCE popped up from 2.72% to 3.37%.

Core measures of PCE inflation have moved away from the FOMC’s 2% target. On the basis of these numbers, it seems unlikely that the Fed will be delivering interest rate cuts in the next few months.

PCE inflation for goods (durable plus non-durable) had been subdued for the past couple of years, actually falling for seven out of the last ten months. Recently, however, goods price inflation has been climbing and is now the highest since 2022. Service price inflation has been high and is climbing, nearly hitting 4% from January to February.

Solid February Employment Report

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The Bureau of Labor Statistics Establishment Survey recorded an increase in employment of 151 thousand for February. This increase is only slightly below the average for the previous 12 months. Another way to think about the February number: it exceeds 6 of the previous 12 month employment gains.

While government employment rose by 11 thousand jobs in February, federal government employment dropped by 10 thousand.

The household survey from the BLS press release indicated a decline in the labor force participation rate (62.6% to 62.4%) and an employment-to-population ratio decline (60.1% to 59.9%). The report showed a slight increase in the unemployment rate, from 4.01% in January to 4.14% in February. For the most part, the unemployment rate has hovered around 4.1% for the last 8 months.

Although the unemployment rate has been trending up over the past year or so, keep in mind that it is, historically, quite low.

PCE Inflation Spikes

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The headlines say that PCE (personal consumption expenditure) inflation fell in January. This is a case of “Yes, but …”. In particular, it is true that the year-over-year PCE inflation rates fell from 2.6% (December 2024) to 2.5% (January 2025) in the case of overall PCE inflation, and from 2.86% to 2.64% for core PCE inflation (that is, excluding food and energy). Looks like the Fed is doing a great job. However, the annualized month-over-month inflation rates jumped from 3.56% to 3.98% (PCE), and from 2.52% to 3.47% (core PCE).

How can we reconcile these divergent patterns to the year-over-year and month-over-month inflation rates? As we have previously explained, the year-over-year inflation rate is roughly the average of the past 12 month-over-month inflation rates. For example, the year-over-year inflation rate for December 2024 is the average of the 12 month-over-month inflation rates in 2024. Similarly, the January 2025 year-over-year inflation rate is the average of the 12 month-over-month rates running from February 2024 through to January 2025. As a result, every month the calculation for the year-over-year inflation rate adds in to this average the current month reading of the month-over-month inflation rate while simultaneously dropping out the monthly rate from 13 months ago. With all of this in mind, for core PCE inflation, the year-over-year rate for January 2025 added in the January 2025 month-over-month rate (3.47%) while dropping the January 2024 rate (6.14%). In this case, the year-over-year rate for January 2025 fell not because of a particularly favorable month-over-month rate for January 2025, but because of an especialy high rate for January 2024!

It is for reasons like this that we developed our measure of trend inflation. Without getting into the details, our measure of trend inflation is a “constant gain” measure of the average month-over-month inflation rates: it applies a constant weight to the current month-over-month rate, with the remaining weight applied to the previous month’s reading of the trend. Our measure of trend PCE inflation rose from 2.52% (December 2024) to 3% (January 2025) while our measure of trend core PCE inflation rose from 2.4% to 2.76%.

Another desirable feature of our trend inflation measure is that it responds reasonably quickly to changes in underlying trend inflation. Visually, we can see that the month-over-month inflation rates have trended up over the last half year. Our measure of trend reflects what can be seen in the data. While the year-over-year inflation rates will eventually also reflect such a change in underlying trend, it will take nearly a year to fully reflect the change in trend. In 2021, inflation rose sharply and the Fed appeared to be asleep at the switch. In particular, our trend measure was rising pretty quickly during 2020 and moved over the 2% target by midyear while the year over year measure stayed below 2% throughout the year and into 2021. One can only hope that the Fed learned something from its earlier mistake.

Job Market Remains Strong

Posted on by Paul Gomme

As reported by the Bureau of Labor Statistics (BLS), according to the Establishment Survey, nonfarm payroll employment rose by 256 thousand jobs in December — well in excess of expectations of 165 thousand new jobs reported by Bloomberg. The BLS noted that December’s job gains exceeded the average monthly gain for 2024 of 186 thousand.

Sectors receiving particular attention by the BLS were: health care added 46 thousand jobs in December (lower than the average of 57 thousand jobs per month in 2024), government gained 33 thousand jobs (down from the 2024 average of 37 thousand), social assistance was up 23 thousand (compared to an average of18 thousand per month in 2024), and retail trade accrued 43 thousand additional jobs in December after losing 29 thousand jobs in November (for the year, retail trade was essentially unchanged).

The household survey showed an increase in employment of 478,000 and a decrease in unemployed persons of 235,000. The employment to population ratio increased to 60% and the participation remained at 62.5%. The unemployment rate fell from 4.23% to 4.09%.

Although the overall labor force participation rate is still much lower than its peak in the late 1990’s, the rate for prime-age workers is close to it’s all-time high.

With a decline in the number of unemployed persons and a recent increase in job openings, we continue to see more openings than persons searching for jobs, meaning jobs are, in some sense, plentiful.

These stronger than expected labor market gains cast more doubt on the potential for future declines in the Fed Funds rate, as indicated in their December 18 announcement:

In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

Indeed, if the next inflation report shows no real progress in moving toward the 2% target, it is quite likely, in our view, that the Fed should take a pause while they wait for more incoming signals.

November PCE Inflation

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Mostly bad news on the inflation front: The Fed’s favorite measure of inflation, core PCE inflation, ticked up from 2.79% in October to 2.82% in November, measured on a year-over-year basis. The good news, such as it is, is that the one-month inflation rate rose at an annual rate of 1.39%, down from 3.19% in October. Of course, regular readers know that these month-to-month inflation rates are volatile. Looking over the past 12 months, this is only the second time that the monthly inflation rate has been below the Fed’s 2% target; in fairness, there were a couple of months when inflation exceeded target by less than 0.1 percentage points. Our trend measure of inflation fell from 2.77% in October to 2.31% in November.

Year-over-year PCE inflation also rose, from 2.31% in October to 2.44% in November while the annualized monthly inflation rate dropped from 2.78 to 1.55%. Our trend measure fell from 2.20% to 1.98%.

In our earlier post on November CPI inflation, we made the case for the FOMC to leave the Fed funds rate unchanged. Not surprisingly, the committee didn’t listen to us, lowering the Fed funds rate by 25 basis points instead. The real side of the economy continues to show strength: Earlier this week, third quarter GDP growth was revised up, from 2.8% to 3.1%; and the labor market shows few signs of weakness. Indeed, Cleveland Fed President Hammack dissented, remarking

Economic growth has been strong, and the labor market is healthy. Broad measures of financial conditions have eased, and business sentiment remains robust. Monetary policy has played an important role in bringing PCE inflation down considerably from its peak of 7.2 percent in the summer of 2022. Despite these positive developments, inflation remains elevated, and recent progress in returning inflation to 2 percent has been uneven.

When we worked within the Federal Reserve System, we knew that holding the line on inflation was job one. Thus far, the FOMC has done a bang-up job of reducing inflation without causing much, if any, of a slowdown. Finishing the job will probably require somewhat tighter monetary policy. This was evident in the recent statement and projections showing the likelihood of fewer cuts over the coming year. So, it seems the FOMC realizes that inflation is not where they wish it to be and they certainly cannot deny that the real side continues to show strength. In terms of future policy, a pause in lowering rates is the right course of action at this time.