The BLS’s Consumer Price Index release is mildly bad news on the inflation front. While the overall CPI inflation rate fell, on an annual basis, from 2.61% in November to 2.65% in December, the monthly rate picked up from 1.23% to 3.75% (on an annualized basis). Our measure of trend rose from 2.19% to 2.71%.
Annual core CPI inflation (that is, excluding the `volatile’ food and energy components) showed little change, rising from 2.62% in November to 2.65% in December). However, the montly rate rose sharply from 0.96% to 2.91%. The increase in our trend measure was more moderate, rising from 1.94% to 2.26%.
The BLS also released Producer Prices for November 2025, so a bit dated. That portion of the producer price index relevant to personal consumption shows inflation running above the FOMC’s 2% target.
Much of our interest in the CPI data arises from its role as a signal for the PCE (personal consumption expenditure) index data that will be released in just over a week. Past experience tells us that while CPI and PCE inflation tend to move together, this is not a tight relationship in that one percentage point increase in CPI inflation is no guarantee that PCE inflation will similarly rise by one percentage point. With this in mind, we regressed measures of PCE inflation against their CPI counterparts, then used these regressions to develop predictions for PCE inflation later this month. This statistical model predicts that year-over-year PCE inflation for December will be around 2.36% (for both overall PCE and core PCE inflation) while our measure of trend will be 2.44% for overall PCE, and 2.11% for core PCE inflation. We will see how well these predictions fare.
Given these numbers it seems unlikely that the Fed will be lowering rates any time soon, i.e., inflation is, by no means, tamed.
We are finally seeing jobs numbers for October and November. The Bureau of Labor Statistics press release studiously failed to mention the loss of 105 thousand jobs in October — except to mention the 162 thousand fall in federal government employment. Perhaps this omission is a leftover from Trump having fired the previous head of the BLS after the BLS revised the May and June employment numbers down. With September employment revised down to 108 thousand (from 119 thousand), there was a scant 3,000 increase in employment over September and October. November delivered an anemic 64 thousand job gain.
As noted in the BLS press release, due to the Federal government shut down, the household survey for October was not collected. In the figures using household survey data, we have allocated half of the change from September to November to each of October and November (and omit the October figure to emphasize that this data is unavailable).
The unemployment rate is similarly missing for October 2025. The November unemployment rate rose to 4.56%, up from 4.44% in September. This is the highest unemployment rate in four years.
Overall, the employment numbers are fairly weak. Although average weekly hours rose from 34.2 to 34.3, so that total hours of work in the US rose. Moreover, firms continue to be opening jobs at a relatively high rate even though the hiring rate has been falling.
Inflation
There were two price index reports released, the September PCE and the November CPI. The September monthly (annualized) PCE rose slightly, from 3.14% to 3.27%. Our preferred trend measure rose from 2.70% to 2.89%. The Fed’s inflation measure of choice, the core PCE (PCEX) fell from 2.68% to 2.40% and our trend measure also fell, from 2.82% to 2.68%. While core PCE inflation is moving in the right direction, it is still above the FOMC’s 2% target.
Due to the federal government shutdown, October data for the Consumer Price Index was not collected. Below, the November CPI inflation rate is the average for the two months from September to November. The monthly annualized CPI rate for October November averaged 1.23%, down from 3.79% in September and our trend measure fell to 2.19% (October-November) from 3.38% in September. In the graphs below we have included the November number with dots. Annualized core CPI inflation was 0.92% in October-November while the trend measure was 1.94%.
Certainly good news on the inflation front: the last reading on the Fed’s preferred core PCE inflation measure moved down (albeit still above target) and the more timely CPI measures have continued downward, a trend that hopefully will soon be reflected in the PCE inflation measures. As inflation approaches target, the inflation hawks on the FOMC will have less reason to insist on keeping interest rates high. At the same time, the slow hiring in the labor market should allow some to argue more strongly for more rate cuts.
On Friday, the Bureau of Labor Statistics released Consumer Price Index data for September. While the annualized month-over-month CPI inflation rate fell (from 4.69% in August to 3.79% in September), the annual rate rose (2.94% to 3.02%) as did our measure of trend (from 3.18% to 3.38%).
Core CPI inflation provides a glimmer of good news: the monthly, annual and trend rates all fell. The annualized monthly inflation rate fell from 4.23% to 2.76; the anual rate from 3.11% to 3.03%, and our trend from 3.38% to 3.17%.
Policy Outlook
Rather than speculate as to what the FOMC is likely to do with its policy rate at its upcoming meeting, we’ll focus on what the committee should do. Keep in mind that the FOMC primarily looks at core PCE inflation, not (core) CPI inflation. However, the PCE data is not scheduled to be released until Friday while the committee meets Tuesday and Wednesday. (Given the federal government shutdown, we were taken by surprise when the BLS released the CPI numbers; we have no idea whether the BEA will similarly release the PCE data on Friday.) Keeping in mind that on average CPI inflation runs ½ percentage points higher than the corresponding PCE inflation rate, our trend measure of core CPI inflation for September suggests that trend PCE inflation can be expected to be around 2.7% – 0.7 percentage points higher than the FOMC’s target of 2%. Alternatively, if the change in trend core PCE inflation is the same as for trend core CPI inflation (0.2 percentage points), expect a PCE inflation rate just over 2.6% – again higher than target. Further lowering the Fed’s policy rate is not warranted given these inflation numbers. As many know, the Fed has a dual mandate and has indicated that the risks of a labor market slowdown has become a major factor in the decision making process. Unfortunately, the BLS has not released the latest employment numbers.
About the only good thing that can be said about the incoming PCE inflation data: It could have been worse. At an annual rate, the month-over-month overall PCE inflation rate popped up to 3.22% in August from 1.97% in July; the corresponding core PCE inflation rate slipped from 2.86% to 2.76%. The annual (year-over-year) PCE inflation rate rose from 2.60% to 2.74%; core, from 2.85% to 2.91%. Finally, our measure of trend PCE inflation rose to 2.72% from 2.46%; trend core PCE inflation fell slightly to 2.84% from 2.88%.
And exactly what is so troubling in terms of the real side of the economy? Granted, there have recently been some very low employment numbers. Yet, a broader look at the labor market doesn’t add up to ringing the alarm bell and lower rates. In terms of job openings, outside of the pandemic, the rate of job openings is pretty much the highest it has ever been. There has been no obvious change in the rate of layoffs. The unemployment rate remains quite low by historical standards. Real gross domestic product was recently revised up, from 3.3% to 3.8%. Using monthly data on non-farm payroll employment, industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales, the probability of being in a recession (here is the Piger website) is 1.0%.
Policy Outlook
In the FOMC’s recent announcement reducing its policy rate by 25 basis points, the committee expressed its opinion that the balance of risks has shifted towards unemployment…and away from inflation. We stand by our earlier opinion that job number 1 for the Fed is low and stable inflation; good real-side outcomes will ultimately result from executing on the inflation front. The risk to the policy outlook is that 3% inflation is the new de facto target, up from the stated 2% target. Already, short-term inflation expectations have risen. Experience from the 1970s and 1980s tells us that it is economically painful to reduce expected inflation. Responsible policy would see the Fed bringing inflation back down to its 2% target, with fiscal policy addressing the jobs situation.
Late this month, we’ll get data on core PCE (personal consumption expenditure) inflation — the measure favored by the Fed. In the meantime, we have CPI inflation which is a noisy signal of what to expect of PCE inflation. The signal points to higher inflation. On a year-over-year basis, core CPI inflation rose from 2.77% to 2.91%. However, this measure of inflation responds slugglishly to changes in trend. The annualized month-over-month rate popped up from 1.57% to 2.77%, or 1.2 percentage points. Meanwhile, our trend measure increased by 0.15 percentage points, from 2.30% to 2.46%.
Overall CPI inflation paints a similar picture: the month-over-month rate rose from 0.97% (annualized) to 3.50; the year-over-year from 2.38% to 2.67%; and our trend measure from 1.91% to 2.43%.
Policy Implications
No doubt, some will attribute at least some of this increase in CPI inflation to the effects of the Trump tariffs. In our opinion, this sort of attribution will require deeper analysis than is afforded by the Bureau of Labor Statistics’ CPI release, and may only be knowable when we have several more months (or years) of data.
If PCE inflation for June (to be released on July 31) similarly increases, FOMC doves and those auditioning to be the next Chair of the FOMC will have a hard time making a convincing economic case for lowering the Fed’s policy interest rate; especially since the real side of the economy has managed to withstand tariff threats and geopolitical intrigue.
According to the BLS Employment Survey, the U.S. economy added another 147 thousand jobs in June — a very respectable number. Although the private sector saw a weak employment increase of 74 thousand.
The BLS noted gains in the government sector (gaining 73 thousand jobs, despite a reduction of 7 thousand at the Federal level) and health care (up 39 thousand jobs).
Average hours of work fell to 34.2 from 34.3 and has been oscillating between the two for several months.
From the Household Survey in the same BLS release, the unemployment rate dipped from 4.24% in May to 4.12% in June.
One dark spot in the employment outlook is that continuing unemployment insurance claims have risen in June. This increase may reflect increased difficulty of the unemployed to find suitable jobs.
JOLTS (Job Openings and Labor Turnover Survey) allows for a deeper dive into the data; this data was released on July 1 and includes data for May but not June. It continues to be the case that there are more available jobs than folks classified as “unemployed” (actively seeking a job). Of course, aggregate measures like these say nothing about the match between skills needed for open jobs, and the skills of the unemployed.
As the job openings rate has fallen since 2022, so has the hiring rate and the quit rate. Since JOLTS is a relatively new survey, it covers a span of time with very few complete business cycles. Consequently, it’s difficult to say what typcally happends to the JOLTS rates at the oneset of a recession. That said, around a recession as the labor market tightens we would expect to see a fall in the quit, openings and hiring rates, and a rise in the layoff rate. Thus far in 2025, it is hard to see any such changes.
While there were some spots of concern, the labor market shows little signs of weakening. Indeed the strength of the June report gives amunition to those on the FOMC advocating for no action at its July meeting.
The BEA’s personal income and outlays release for May provides a mixed message on PCE (personal consumption expenditure) inflation. Core PCE inflation which excludes the more volatile food and energy components rose from 2.58% to 2.68% on a year-over-year basis. This is the measure of inflation favored by the Federal Open Market Committee. The month-over-month rate popped up from 1.64% to 2.17% at an annual rate. And yet, our trend measure of inflation fell from 2.56% to 2.43%. Why the difference in these measures of inflation? Mechanically, the year-over-year rate is the average of the last 12 month-over-month inflation rates. The increase in the year-over-year inflation rate reflects the fact that this 12 month “window” added May 2024 (2.17%) while dropping May 2023 (0.98%). Meanwhile, our trend measure fell because the May 2024 month-over-month inflation rate (2.17%) is less than our trend measure for April (2.56%).
The picture is largely the same when looking at the overall PCE inflation rate: The month-over-month rate rose from 1.42% to 1.64%; the year-over-year rate edged up from 2.20% to 2.34%; and our trend measure eased from 2.25% to 2.04%.
The BEA release also shows a decline on a month-over-month basis in nominal personal consumption expenditures. However, this is a very volatile series. The year-over-year growth rate smooths out these fluctuations. Over the past few years, personal consumption expenditure growth has been falling. We place little importance in the month-over-month decline reported for May.
Real personal disposable income fell in May when computed on a month-over-month basis (its growth rate was negative) while the year-over-year growth rate declined.
Today, the University Of Michigan released its survey-based measure of inflation expectations over the next 12 months. In brief, consumers’ expectations of inflation have risen in 2025 and now sit at nearly 7%. Alternatively, the 5-year Breakeven Inflation Rate measures the average inflation rate over the next 5 years based on 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities. Given that the inflation-indexed security is based on the CPI (consumer price index), and CPI inflation tends to run 0.5 percentage points higher than PCE inflation, it seems that investors expect inflation to average very close to the Fed’s 2% target.
The University of Michigan also released its measure of consumer sentiment (or “confidence”). While this series exhibits considerable volatility, it seems fair to say that consumer sentiment has dropped quite sharply in 2025.
Policy Implications
Is it time for the FOMC to start lowering its policy rate? Jockeying by potential candidates for the Chair of the FOMC suggests it is. Based on the data, it’s hard to make a strong case for lowering the Fed funds rate at this time. The data analyzed above tells us that inflation is still running a bit too hot relative to the Fed’s 2% target for core PCE inflation. The labor market continues to record solid employment gains. In about a month, we will get an initial reading on Gross Domestic Product for the second quarter, but at this juncture, it seems likely to be a solid quarter. One could argue that the FOMC can raise rates again if inflation pops up. But this sort of interest rate volatility is something that the Fed tries to avoid, and it always seems more difficult to raise rates than to lower them. In summary, the economic case points to maintaining the Fed funds rate at its current level.
The FOMC announcements have typically called for no change in policy in order to wait for more conclusive data, given the uncertainty in tariffs as well as geo-political concerns. There does not seem to be much in the way of additional clarification, other than PCE core inflation has been riding steadily above the Fed’s preferred target.
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.
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.
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.
