Author: Paul Gomme

May PCE: Is inflation getting out of hand?

Posted on by Paul Gomme

By Paul Gomme and Peter Rupert

The Bureau of Economic Analysis has released Personal Consumption Expenditure data for May. On an annual basis, overall PCE inflation rose from 5.03% (April) to 5.53% (May). The year-over-year inflation rate also increased, from 3.80% to 4.07%. Our measure of trend PCE inflation is similarly up, from 5.29% to 5.37%. The Fed’s stated target is 2% inflation.

The Fed’s preferred measure, core PCE inflation shot up from 3.05% to 3.91% (month-over-month, annualized), or from 3.32% to 3.41% (year-over-year). Our measure of trend: 3.75%, up from 3.67%.

The new FOMC Chair, Kevin Warsh, has his job cut out for him. To be sure, after inflation rose in the post-pandemic environment, the Jerome Powell-led Fed failed to bring inflation down to its 2% target. Developments in the US-Iran war have, no doubt, contributed to the increase in overall PCE inflation. However, core PCE inflation — which strips out the “volatile” food and energy components — is far less susceptible to these developments.

To understand the problem facing Warsh, suppose that there are two types of central bankers: hawks who are tough on inflation, and doves who are not. It’s cheap for central bankers to go around telling everyone that they’re a hawk. Such speeches are largely uninformative. The implication is that when there is a change in leadership, the public is quite uncertain whether the new leader is a hawk or a dove. (We’re ignoring the unlikely case in which the central banker wants to be known as a dove.) How does a central banker gain a reputation for being a hawk? By making tough decisions that a dove would not. In the current environment, a dove would be prone to lowering the Fed funds rate; a hawk would raise it. Leaving the rate unchanged may well be interpreted as being dove-like. Importantly, once a central banker comes to be viewed as a dove, it is very difficult to rehabilitate that reputation: it would requite a prolonged period of hawk-like actions. Assuming that Warsh is committed to a 2% inflation target, he has a tough choice between: (a) immediately behaving like a hawk, raising the Fed funds rate; or (b) later acting like a hawk and for a much longer period of time. Acting later will be economically more disruptive than acting preemptively. Good luck Mr. Warsh.

May CPI and Employment

Posted on by Paul Gomme

By Paul Gomme and Peter Rupert

Squinting just the right way, one may see some good news in the recent CPI report. To be sure, inflation is running far too high. On an annualized month-over-month basis, inflation was 5.82% in May — but that’s down from 7.96% in April. Our measure of trend inflation was 6.14% in May compared to 6.30% in April. That the year-over-year inflation rate rose from 3.78% to 4.17% chiefly reflects the burst in inflation that started with the US-Iran war.

The story is much the same with core CPI (that is, after stripping out food and energy prices). The month-over-month rate fell from an annualized 4.61% (April) to 2.53% (May); our measure of trend also fell from 3.26% to 3.01%. Again, the year-over-year measure rose, from 2.74% to 2.82%.

What all of this means for monetary policy is anyone’s guess. New Fed Chair Kevin Warsh is said to prefer trimmed mean measures of inflation. In brief, trimmed means throw out those prices with the highest and lowest changes in any given month. We suppose Warsh means trimmed PCE inflation, but maybe he means trimmed CPI inflation. Will the rest of the FOMC go along with Warsh? The danger in switching from core PCE to trimmed mean PCE inflation is that the Fed may be seen as acting opportunistically, choosing a measure of inflation that fits preconceived notions regarding the future trajectory of the Fed funds rate.

Employment report

The BLS announced that payroll employment increased 172,000, again crushing expectations. The private sector added 120,000 and the government also showed an increase of 52,000.

It has not been a very good year for private forecasters when it comes to employment…no one said it was easy!

Employment ForecastActual
January55,000160,000
February50,000-156,000
March59,000202,000
April62,000177,000
May88,000172,000

Average weekly hours remained at 34.3 and average hourly earnings rose from $37.41 to $37.53.

The household survey showed an increase of 149,000 and the number of unemployed persons fell by 66,000. The unemployment rate fell slightly, from 4.34% to 4.30%.

Overall, the labor market continues to perform above “expectations” and will make it difficult for policy makers to point to a weak economy.

April CPI inflation

Posted on by Paul Gomme

The good news from the Bureau of Labor Statistics’s CPI report is that annualized monthly CPI inflation fell from 10.89% (March) to 7.96% (April). Compared to a year ago, prices are up 3.78% (April) compared to 5.47% (March). Our measure of trend CPI inflation rose from 5.47% to 6.30%.

Core CPI inflation (that is, excluding food and energy) rose from 2.38% to 4.61% on an annualized monthly basis; from 2.60% to 2.74% for the year-over-year. Our measure of trend core CPI inflation rose from 2.58% to 3.26%.

Of course, the big news is the energy price shock due to the ongoing conflict in the middle east. Looking at energy commodities (gasoline and fuel oil), April (92.8%) also fell compared to March, 919%, but the March number was in rarefied air, see the scale on the vertical axis. Moreover, inflation expectations have begun to creep up. The hope, of course, is that the oil supply problem will be a temporary blip.

The Personal Consumption Expenditure price index will not be released for a couple of weeks. While the CPI for April suggests that monthly PCE inflation may fall, all other measures — including the all-important core PCE inflation — are likely to continue moving away from the FOMC’s 2% target.

January PCE Inflation is up (again)

Posted on by Paul Gomme

The year-over-year core PCE inflation rate ticked up from 3% in December to 3.06% in January. The outlook is worse in the sense that the annualized month-over-month core PCE inflation rate has been running well over 4%. As discussed in previous posts, the year-over-year rate is roughly the average of the previous 12 month-over-month inflation rates. As a result, the change in the year-over-year rate between December 2025 and January 2026 is determined by the difference in the month-over-month observation being added into this 12 month average, 4.45% for January 2026, and the observation being dropped, 3.84 for January 2025. Our trend measure of inflation is the happy medium of the volatile month-over-month rate and the slow-to-adjust year-over-year rate. Trend core PCE inflation rose from 3.14% in December to 3.58% in January.

Year-over-year overall PCE inflation fell slightly from 2.91% in December to 2.83% in January as the month-over-month rate fell from 4.39% in December to 3.35% in January. Our trend measure moved up from 3.26% to 3.29%.

Policy Outlook

The bottom line is that core PCE inflation is running well above the Fed’s 2% target. Keep in mind that the latest PCE release is for January 2026. Earlier this week, CPI data for February was released. It is not until April 9 that the corresponding PCE data will be available — the delay once again due to the month-long federal government shutdown in the Fall. Consequently, the effects of the runup in oil prices in anticipation of the war with Iran have yet to show up in the PCE price data. While core inflation measures strip out the immediate effect of changes in energy prices, the effects of the war will eventually filter into other prices, partly through increased transportation costs that will be priced in to final goods prices, and eventually into food prices since the Middle East is an important supplier of fertilizer ingredients.

Consumer and Producer Prices

Posted on by Paul Gomme

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.

Inflation and jobs

Posted on by Paul Gomme

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.

September CPI Inflation

Posted on by Paul Gomme

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.

PCE Inflation: Still Too High

Posted on by Paul Gomme

By Paul Gomme and Peter Rupert

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.

CPI Inflation Pops Up in June

Posted on by Paul Gomme

By Paul Gomme and peter rupert

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.

June Employment Report

Posted on by Paul Gomme

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.