The June CPI numbers point to lower inflation. On an annualized month-over-month basis, CPI inflation fell from 0.07% to -0.67%; core CPI inflation dropped from 1.97% to 0.78%. The year-over-year measures recorded more modest declines, from 3.25% to 2.98% for CPI and 3.41% to 3.28% for core CPI. As we have emphasized in past posts, the monthly inflation rate is quite volatile while the annual inflation rate is slow to reflect changes in trend. For June, our measure of trend CPI inflation plunged by 1.1 percentage point to 1.58% while trend core CPI inflation fell 0.8 percentage point to 2.46%
Policy Implications
In about two weeks, the PCE deflator for June will be released. If our trend core PCE inflation falls by the same 0.8 percentage points that core CPI inflation fell, then trend core PCE inflation will sit at 1.8% – comfortably below the Fed’s 2% target. Alternatively, CPI inflation tends to run about 0.5 percentage points higher than PCE inflation. On this basis, one might expect our trend core PCE inflation for June to come in at 2.1% – just outside the Fed’s 2% target. Chairman Powell’s testimony earlier this week raised expectations of a rate cut this year, although the chairman was silent regarding the timing. Given the declines of the recent numbers, it appears that the Fed has pretty much achieved its longer run inflation goal. The real side of the economy seems to have been mostly unaffected by the rapid increases in the fed funds rate. The FOMC next meets July 30-31. As this stage, the question is: will the FOMC lower its policy rate at the end of July, or wait until September? The debate will probably hinge on what are the potential costs of cutting rates in July, if any? Stay tuned.
The BEA announced May PCE (Personal Consumption Expenditure) data that reinforces the earlier CPI (Consumer Price Index) report: Inflation continues to creep down. Annualizing the month-over-month change in the PCE, inflation for May was 1.55%, well below the Fed’s 2% target. As we have commented before, these month-to-month changes contain a lot of noise and our preferred measure is the annualized 3 month change. By this measure, inflation for May was 2.45% – somewhat higher than the 2.2% reported earlier for the CPI. The headline year-over-year PCE inflation rate for May was 3.85%. As we have emphasized in previous posts, this year-over-year measure of inflation is slow to respond to changes in trend which means it will take some time for the year-over-year inflation rates to reflect the lower inflation rates that have come in over recent months.
Less rosy is the inflation picture coming from core PCE (that is, excluding food and energy). While the month-over-month rate was down in May – from 4.65% to 3.84% – the year-over-year and 3 month measures fell by roughly 0.1 percentage points. Presumably, the reason to look at core PCE inflation is that it provides a better gauge of underlying trend inflation than non-core PCE measures. But for our money, the 3 month PCE inflation rate does a good job capturing developments in trend inflation.
For June, expected inflation is now running below 2% at all horizons. Collectively, the results for CPI, PCE and expected inflation suggest that the tightening of monetary policy over the past year-and-a-half has brought down both actual and expected inflation. In this context, the Fed’s decision in June to pause its tightening of monetary policy seems like a good one, especially if one takes into account the well-known long and variable lags of the effects of monetary policy on the economy.
Finally, while we at Economic Snapshot usually do not comment on GDP (Gross Domestic Product) revisions, we are making an exception for the data released on Thursday by the BEA. The output revision was a very large 0.7 percentage points, from 1.27% to 2.00%. This upward revision of output can be attributed to upward revisions in consumption and exports, and a downward revision of imports (which has a positive effect on output since imports are subtracted from output). These effects were partially offset by small revisions in investment and government spending.
Second Revision
Third Revision
Difference
Output
1.27
2.00
+0.73
Consumption
2.65
2.93
+0.28
Investment
-2.10
-2.17
-0.07
Government
0.88
0.85
-0.03
Exports
0.66
1.00
+0.33
Imports
-0.75
-0.37
+0.38
GDP growth for the first quarter of 2023, and contributions to GDP growth by its major components.
The increase in real GDP was widespread according to the state GDP estimates. Real GDP increased in all 50 states in Q1. The largest increase came in North Dakota, 12.4% at annual rate and the lowest in Rhode Island and Alabama at 0.1%. Personal income increased in all but two states, Indiana (-1.0%) and Massachusetts (-0.9%).
The BLS announced that payroll employment climbed 339,000 in May. The private sector added 283,000. The bulk of the gain was in the service sector, adding 257,000. The goods sector increased 26,000 but almost all of it, 25,000, in construction.
Although employment climbed 339,000, average weekly hours fell from 34.4 to 34.3 (a decline of 0.1%), throwing a little cold water on the overall report. As shown in the chart below, average weekly hours have trended down since late 2020. Hourly pay, however, climbed 0.3%, from $34.33 to $34.44, and the year over year increase was 4.30%; unfortunately, that growth is still a bit below the year-over-year CPI inflation rate for April, 4.96% (the May CPI has not yet been released).
The household data showed almost exactly the opposite from the establishment survey with an employment decline of 310,000. The employment to population ratio fell slightly from 60.4 to 60.3, and still falls below the pre-pandemic level of 61.1.
The unemployment rate is based on data from the household survey. As mentioned above, employment fell by 310,000 according to the household survey. Combined with a 440,000 increase in the number of unemployed persons, the unemployment rate rose from 3.39% to 3.65%. The changes in the number of employed and unemployed left the labor force participation rate unchanged at 62.6%.
To be “officially” classified as unemployed, an individual must have “actively” looked for a job and available to begin employment. This definition excludes those who are deemed “marginally attached” to the labor force who would like a job, but have not taken sufficiently active measures to find one. The chart below plots the headline unemployment rate along with a measure that includes marginally attached individuals as well as those employed part time for economic reasons (the “U-6” definition). Whereas the headline unemployment rate is 3.7%, the broader measure of unemployment stands at 6.7%. The gap between the two, 3.0%, is about as low as it has been since 1994 when the U-6 measure of the unemployment rate starts.
Until the early 1980s, female unemployment tended to exceed that of men; since then, the pattern has reversed. Since 2021, the male unemployment rate has exceeded that of women by 0.17 percentage points.
Note: We use the terminology of the BLS so as not to add any confusion, in particular, Sex and Race. Also, the BLS uses the terminology Race and Hispanic or Latino Ethnicity.
Historically, Black and African American unemployment rates have exceeded that of other racial groups. Since 1973 (when the data becomes available), the Black and African American unemployment rate has averaged 6.1 percentage points higher than that of whites. Over time, this gap has narrowed; since 2021, it has averaged 3.1 percentage points. Hispanic and Latino unemployment rates lie between that of Blacks/African Americans and whites. (Note that we have seasonally adjusted the Hispanic and Latino unemployment rates using Python’s ARIMA X11 package with default settings; officially seasonally adjusted series are not available.) Over the available data, the Hispanic/Latino unemployment rate exceeded that of whites by 3.15 percentage points; since 2021, by 1.5 points. The Asian unemployment rate is only available since 2003. On average, their unemployment rate is 0.55 percentage points lower than that of whites; since 2021, the gap is only 0.09 points.
We can further look at unemployment rates by sex and race, albeit for those 20 years of age and older. As mentioned earlier, since the early 1980s, for the population as a whole the male unemployment rate has exceeded that of women. While the same is generally true for Blacks/African Americans and whites, the average unemployment rate for Hispanic/Latino women is 0.95 percentage points higher than that of Hispanic/Latino men. Data for Asians is not broken down by sex.
People enter unemployment through various channels. The largest component is for people who lose their job, that represents about half of all of the unemployed. The next largest category is from those who reenter the labor force after a spell of being absent; these are labeled reentrants. Then there are those that voluntarily leave their jobs and those who are just entering the labor force.
Looking across those unemployed, average weeks of unemployment has been trending up somewhat over time. Between 1950 to 1980 average weeks of unemployment hovered between 10 and 15 weeks. Indeed, average weeks never hit 20 weeks until after 1980. Since that time average weeks have hit 20 or more numerous times and today stands at just over 21. The Great Recession and the pandemic had massive effects on weeks of unemployment.
Overall, the labor market continues its strong performance. While the unemployment rate increased it still remains as low as the economy has seen for decades.
We are not seeing a lot in this employment report to warrant any large changes in beliefs about the current stance of the labor market. The headline number in the Establishment Survey showed a gain of 311,000, solid, but not remarkable. There were gains in: (1) leisure and hospitality (105,000), (2) retail trade (50,000), (3) government (46,000, of which 37,000 is local government) and (4) health care (44,000). It also mentions losses in: (1) information (25,000), and (2) transportation and warehousing (22,000). It also notes that the information sector has shed 54,000 jobs since November of 2022. There were 25,000 jobs lost in the information sector in February, 9,000 of which were in the Motion Picture and Sound Recording Industry, and 3,000 were in Telecommunications.
Throwing a little cold water on the report were sizable downward revisions to the Establishment Survey employment gains for December (down 21,000 to 239,000) and January (down 13,000 to 504,000). The figure below gives a historical perspective on the first (initial) release, the second (revised) release, and the third (final) release.
In addition to the downward revisions, average weekly hours (private non-farm payroll) are down 0.1 hours, to 34.5. However, average weekly hours are still “high” by (recent) historical standards. Having said that, the combination of the rise in employment with the decline in average hours led to an overall decline in total hours of work by about 4 million, or 1%.
Average hourly earnings were up $0.08 and up about 4.6% year over year. However, CPI inflation continues to erode real average earnings.
The Household Survey showed that the number of people unemployed (up 242,000) and the unemployment rate (from 3.43% to 3.57%) rose. The labor force expanded by 419,000, moving the labor force participation rate to 62.5%. All groups except for teens have been trending up slightly since the end of the pandemic.
Overall, the labor market remains one of the strongest in recent memory. Not only is employment growing at a solid pace, the number of job vacancies has stayed substantially higher than the number of people unemployed and is unprecedented since these data began at the end of 2000. The relationship between vacancies and unemployment, known as the Beveridge Curve, has had a strange journey due to the pandemic. During the Great Recession the unemployment rate increased substantially as vacancies continued to decline. The “counterclockwise” pattern, standard in the search and matching framework, saw a reduction in the unemployment rate as vacancies began to increase. The unprecedented closures to business at the onset of the pandemic drove the unemployment rate to 15% even though vacancies did not decline substantially. Today, vacancies are near an all time high and unemployment near an all time low.
Inflation as measured by the Consumer Price Index (CPI) was down, again, in December. The monthly change for the CPI in December came in at -0.079% after increasing 0.096% in November and 0.44% in October. The year over year change in December was 6.42% following 7.12% in November and 7.76% in October. (Since we use seasonally adjusted CPI data, our annual inflation rates differ slightly from the headline numbers that use unadjusted data.) In fact, since July the monthly annualized inflation rate consistently ran below the annual inflation rate, as shown in the figure below. Roughly speaking, the annual inflation rate is the average of the previous 12 months’ inflation rates. As a result, when the monthly inflation rates are below the annual inflation rate — as has been the case in the second half of 2022 — the annual inflation rate will fall. Conversely, when the monthly inflation rate exceeds the annual inflation rate, the annual inflation rate will rise, as it did between July 2020 and June 2022. This discussion implies that it will take another six months of low monthly inflation rates until the annual inflation rate will be reported to be low.
At this stage, it’s helpful to take a step back and ask: What exactly do we mean by “inflation”? In general, inflation refers to an on-going increase in the general level of prices. Operationally, inflation is typically measured by the percentage change in a price index like the CPI, Core CPI (the CPI excluding its more volatile food and energy components), or the Personal Consumption Expenditure (PCE) price index, to name but three. As shown in the next figure, over long horizons, these three measures of inflation tend to move together.
A couple of issues arise. First, over what horizon should inflation be computed? Since inflation is an ongoing process, monthly inflation rates don’t do the trick since they’re far to volatile (see the first chart above). While annual inflation rates are much smoother than their monthly counterparts, annual inflation rates are slow to reflect changes in trend as in the second half of 2022. A simple rule like “Use a three or four month average of the monthly inflation rates” is tempting, but arbitrary. It is, perhaps, best to look at both annual and monthly inflation rates and apply some judgement.
A second issue is that a once-and-for-all increase in the price level is not really “inflation” in the sense of a continuing increase in the price level. However, the (annual) inflation rate as computed from, say, the CPI will record higher inflation following such a one-time change in the price level. Indeed, such a change in the price level will lead to an increase in reported inflation for 12 months. The relevance of this second issue is that the war in Ukraine pushed up global food and energy prices. To the extent that these price increases are permanent, they do not contribute to inflation (on-going increases in prices), although they raise measured inflation. To be sure, core CPI inflation (that is, stripping out the food and energy components) has been lower than overall CPI inflation. Comparing the monthly inflation rates for the CPI and core CPI reveals that monthly core CPI inflation is less volatile. In the event, at least some of the increases in food and energy prices owing to the Ukrainian war have proved to be temporary. Falling food and energy prices in the second half of 2022 have contributed to the decline in monthly CPI inflation. As shown in the chart below, monthly core CPI inflation continues to run well above the Fed’s stated 2% inflation target.
A Quick Primer on Price Level Measurement
The idea of inflation measurement is to uncover a general rise in prices in an economy. The two that garner the most attention, the Consumer Price Index (CPI) and the Personal Consumption Expenditure Index (PCE). The Bureau of Labor Statistics (BLS) calculates the CPI (see the technical note here):
The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all urban consumer group represents about 93 percent of the total U.S. population. It is based on the expenditures
of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers.
The CPI is a “cost of living” index as it uses spending patterns of urban consumers:
In calculating the index, price changes for the various items in each location are aggregated using weights, which represent their importance in the spending of the appropriate population group. Local data are then combined to obtain a U.S. city average.
The BLS also reports the “CPI less food and energy,” the CPI-X. The reason for omitting food and energy is that these prices are very volatile and have a large influence on the measure of the CPI because of the larger weights associated with them. For those interested, here are the current weights.
The PCE is calculated by the Bureau of Economic Analysis (BEA) that is also responsible for calculating GDP. According to the BEA:
BEA’s closely followed personal consumption expenditures price index, or PCE price index, is a narrower measure. It looks at the changing prices of goods and services purchased by consumers in the United States. It’s similar to the Bureau of Labor Statistics’ consumer price index for urban consumers. The two indexes, which have their own purposes and uses, are constructed differently, resulting in different inflation rates.
The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and for reflecting changes in consumer behavior. For example, if the price of beef rises, shoppers may buy less beef and more chicken. Also, BEA revises previously published PCE data to reflect updated information or new methodology, providing consistency across decades of data that’s valuable for researchers. The PCE price index is used primarily for macroeconomic analysis and forecasting.
These are not the only two, however. The Cleveland Fed produces the median CPI and the 16% trimmed mean. Recall that the main idea is to capture a general rise in prices. Removing highly volatile changes, or outliers, better reflects this general rise. Note that the median measure has been stuck at 7% for the last three months.
The third estimate of Q4 Real GDP, released today indicates anemic output growth of 0.4% (saar), although it was revised up from 0.1%. The estimate for 2012 annual growth stands at 2.2%, higher than the 1.8% growth seen in 2011. Government consumption continues to fall, down 7.0% overall, with federal government consumption down 14.8%.
The higher revision came mainly from fixed investment: (advance: 9.7%, second: 11.2%, third: 14.0%) and exports: (advance: -5.7%, second: -3.9%, third: -2.8%). Consumption expenditures, on the other hand, were revised down (advance: 2.2%, second: 2.1%, third: 1.8%)
