U.S. Economic Snapshot

by paul gomme and peter rupert

The BEA announced that the price index for Personal Consumption Expenditures (PCE) rose 4.60% on an annualized basis, the largest increase over the past year. Our preferred trend measure increased 3.75%, the largest increase in three years. The fact that the year-over-year increase actually fell (2.83% to 2.80%), and remains low, underscores our use of the trend measure: the year-over-year measure moves slowly.

Lest one thought that the reason for the big jump in the PCE was due to the roiling in the oil/energy market, prices in the PCE bundle excluding food and energy rose 4.49% on an annualized, though fell slightly from January’s reading of 4.81%.

One area that showed a major jump was in goods prices, likely affected by the disruption of transportation. Goods prices increased 9.27% on an annualized basis and our trend measure was up 4.36%.

Meanwhile, the Bureau of Labor Statistics released the Consumer Price Index (CPI) data for March. Ugly results are seen in the overall CPI picture. On an annualized basis, the month-over-month inflation rate rose from an unacceptable 3.25% (February) to an even worse 10.89% (March). To be sure, this increase was largely driven by the energy component of the CPI. The one month (that is, not annualized) price changes were: gasoline +21.2%, fuel oil +30.7%, overall energy +10.9%. To put these numbers into perspective, the one month change in the CPI was +0.9%. The year-over-year inflation rate rose more moderately, from 2.43% (March) to 3.29% (April). Our trend measure rose from 2.76% to 5.47%.

Turning to core CPI (that is, excluding food and energy), the annualized month-over-month inflation rate actually fell from 2.62% (February) to 2.38% (March) while the year-over-year tate rose slightly from 2.47% to 2.60%. Our measure of trend inflation also fell, from 2.68% to 2.58%.

Given the increase in inflation recorded in the March CPI report, we expect that the March PCE will similarly increase. However, these increases can be directly traced to the effects of the U.S./Israeli-Iran war on global oil supply and prices. The consensus among news commentators is that the effects of these global oil shocks will be temporary: Iran will allow shipping through the Strait of Hormuz to return to pre-war levels which will increase global oil supply. Even so, the effects on prices may last months. In such a circumstance, focusing on core inflation measures is justified. Further, measures of expected inflation do not indicate lasting effects.

Obviously, the jump in prices will affect the Fed’s next rate decision, but with the strong reading in the employment numbers and the current inflation numbers we see little chance in an interest rate cut in the near future.

by paul gomme and peter rupert

The BLS announced that payroll employment increased 178,000. The private sector added 186,000 while the government sector shed 8,000 jobs. Revisions to the two previous months were pretty much a wash, with January revised up 34,000 and February revised down 41,000.

The private service sector added the bulk of the jobs, increasing 143,000 with 89,900 coming from health care and social assistance.

Average weekly hours fell from 34.3 to 34.2. Combined with the employment change means that total hours fell slightly. Average hourly wa

Average hourly earnings rose from $37.29 to $37.38. Over the year earnings growth continues to outpace CPI inflation, meaning real wages have been rising since 2023.

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.

by paul gomme and peter rupert

The BLS announced that the CPI in February rose 3.25% on an annualized basis. Year over CPI inflation was 2.43% up from 2.39% in the previous month. Our preferred trend measure was little changed at 2.68% compared to the previous month. Anticipation of the war appears to have pushed up oil prices in February which may account for the 11.1% (250% annualized) monthly increase in fuel oil.

The annualized core measure (ex food and energy) fell from 3.59% to 2.62%, year over year changed little coming in at 2.47% compared to 2.51% in the previous month. Our trend measure, 2.68% was little changed from the previous month’s 2.71%.

Drilling down farther, the CPI for services less rent on shelter shows a 3.34% increase in our trend measure, although the monthly number has come down from 4.25% in January to 3.43% in February.

The Fed continues to be in a bit of a pickle. While inflation is moving in the wrong direction, there are signs of weakness in the labor market. At this time, however, keeping inflation in check is job one for the Fed and we see no convincing argument for lowering rates in the near future.

by paul gomme and peter rupert

The BLS announced that payroll employment dipped 92,000. The decline was pretty widespread as there were a lot of negative signs across almost all industries. The private sector declined 86,000. Both the information and government sectors continued their long decline.

The health care industry was likely affected the employment numbers. Healthcare work stoppages increased 58.3% and the number of workers involved rose 151.9% from 2024 to 2025 — the largest increase of any industry. Healthcare accounted for 40.3% of all striking workers and ranked first in total strike days with over 1.2 million. In January 2026, 31,000 members of UNAC/UHCP went on strike at Kaiser Permanente facilities in California and Hawaii — the largest open-ended strike of registered nurses and healthcare professionals in US history. After four weeks, the union announced an unconditional return to work as negotiations moved closer to resolution.

Nearly 15,000 nurses across four New York City hospitals began an open-ended strike on January 12, 2026. Nurses at Montefiore and Mount Sinai eventually ratified new contracts, while about 4,200 nurses at NewYork-Presbyterian remained on strike as of mid-February.

Average weekly hours remained at 34.3 and average hourly earnings increased from $37.13 to $37.32 (0.4%). Indeed, over that past couple of years, real earnings have risen as year over year earnings growth has exceeded CPI growth.

The unemployment nudged up from 4.32% to 4.44%

Policy Outlook

We expect to see lots of chatter about what the FOMC should do at its next meeting. The inflation rate remains above the Fed’s 2% target. The January employment report was generally considered meh; February’s will be a cause for concern. Output growth for 2025Q4 was neither too hot nor too cold. The war with Iran adds to uncertainty. Good time to hold rates steady?

by paul gomme and peter rupert

The BEA announced that real GDP increased 1.4% in Q4 and 4.4% in Q3. Consumption grew at 2.4%, the largest contributor to overall GDP growth.

Real investment increased 3.8%. Non-residential structures investment declined for the eighth straight quarter and residential investment has declined in six of the last eight quarters. The biggest drag on GDP came from the government sector, falling 5.1% and contributed -0.9 percentage points to overall GDP.

Prices

No good news for prices. The BEA announced that the personal consumption expenditures price index (PCE) increased 4.35% in December on an annualized basis. Our preferred trend measure increased 3.23%. Excluding food and energy, prices also rose 4.35% and our trend measure came in at 3.11%. Of particular note: all of the PCE-based inflation measures that we report on a regular basis are up and well above the Fed’s 2% target.

Keep in mind that the Federal government shutdown in October 2025 has delayed the release of PCE data. Prior to the shutdown, the December data would have been released at the end of January, not late February. We’ve been using a naive forecast of PCE inflation using CPI inflation data. This forecast did not do too well for December. Trend PCE inflation for December was forecast to be 2.47% (down 20 basis points from November); in fact, this measure of inflation was 3.23% (up 56 basis points). Similarly, trend core PCE inflation was forecast at 2.11% (down 39 basis points) whereas it actually rose to 3.11% (up 61 basis points). With all of this in mind, the forecast for January is: trend PCE inflation, 2.29%; trend core PCE inflation, 2.46%.

Policy outlook

Given the rise in the inflation numbers and a moderate change in GDP, it certainly seems like there isn’t much of a chance for an interest rate cut any time soon. The labor market (see below) doesn’t change that view since the report last month did not have any major surprises.

by paul gomme and peter rupert

The BLS announced that employment rose by 130,000 in January. Of particular interest, the private sector added 172,000 jobs as the government shed 42,000.

The goods producing sector saw an increase of 36,000 jobs, mostly in the construction sector, up 33,000. Something we haven’t seen in a while…manufacturing employment increased 5,000, the first increase in, well, a lot of months. The information sector, however, continues to shrink, losing another 12,000 jobs.

As noted in its press release, the BLS annual benchmarks the establishment data against more comprehensive measures of payroll employment. This benchmarking exercise lowered nonfarm employment for March 2025 by 860,000 for the raw data, and by 898,000 for seasonally adjusted data. These downward revisions dwarf the 181,000 jobs gained for all of 2025.

The household survey, that collects information on the civilian labor force status, showed that the labor force (the sum of employed and unemployed) increased 387,000 while the number of unemployed fell 141,000, leading to a slight decline in the unemployment rate from 4.38% to 4.28%.

Overall CPI inflation fell in January. The annualized monthly inflation rate fell from 3.63% in December to 2.07% in January. Annual (year-over-year) inflation fell more modestly, from 2.73% (December) to 2.51% (January). Our measure of trend inflation fell from 2.65% (December) to 2.39% (January).

Monthly core CPI inflation rose sharply from 2.83% to 3.60% while annual inflation fell moderately from 2.65% to 2.51%. As we have previously discussed, both of these measures have important drawbacks: high volatility in the case of monthly inflation, sluggishness for annual inflation. Our trend measure, designed to address these shortcomings, rose from 2.26% to 2.71%.

Regular readers know that the FOMC focuses on (core) PCE inflation, not CPI inflation. However, CPI data is typically released two weeks earlier than the PCE data, and given the overlap in coverage, CPI inflation provides a useful, more timely information on the likely PCE inflation rate. The information lag has been exacerbated by the Federal government shutdown last fall: data for December is scheduled to be released late next week. To predict the soon-to-be-released PCE inflation rate, we regressed a measure of PCE inflation (for example, trend core PCE inflation) against its corresponding, contemporaneous CPI inflation rate. For months when PCE data has not been released, we use this regression to forecast PCE inflation.

Overall monthly PCE inflation for December is forecast to be 3.20%, higher than the observed value of 2.52% in November; this measure of inflation is then expected to fall to 2.08%. The annual PCE inflation rate is projected to fall from 2.77% in November to 2.63 in December and further fall to 2.14% in January. Our trend measure is seen to fall from 2.55% (November) to 2.47% (December) and subsequently to 2.28%.

Monthly core PCE inflation is expected to rise from 1.94% (November) to 2.69% (December) and then to 3.16% (January). The picture for annual core PCE inflation is better: November’s 2.79% rate is forecast to fall to 2.37% in December and further fall to 2.26% in January. Our trend measure of core PCE inflation is projected to fall from 2.39% in November to 2.11% in December before rising again to 2.45%.

Markets and most commentators expect that the FOMC will leave the fed funds rate unchanged at its next meeting. This week’s data helps explain why. The labor market is holding up quite well with reasonably strong job creation (particularly in the private sector) and the unemployment rate is fairly low. Meanwhile, inflation is stuck above the FOMC’s 2% target.

by paul gomme and peter rupert

This morning, the BEA released updated third quarter GDP and Personal Income and Outlays. Real GDP growth was revised up from 4.3% to 4.4% for the third quarter of 2025. The largest contributor to the GDP growth came from consumer spending, rising 3.5%, that contributed 2.34 percentage points to the overall growth. Investment showed no change, however, both non-residential and residential structures declined sharply, 5.0% and 7.1%, respectively, while equipment and intellectual property products increased 5.2% and 5.6%, respectively.

The BEA is clearly working hard to get back onto schedule, releasing Personal Income data for October and November 2025. This release is the source for PCE (personal consumption expenditure) price data. Starting with the overall PCE inflation, the annualized month-over-month inflation rate for November was 2.52%, up from 1.93% in October, but down from3.18% in September. The annual, or 12 month-over-12 month, inflation rate was 2.77% in November, little changed from September (2.74%) but up slightly from October (2.68%). Our measure of trend inflation was 2.55% in November, almost the same as in October (2.56%) and down from September (2.88%).

Turning to core PCE inflation (that is, excluding food and energy), the annualized monthly inflation rate was 1.94% in November, down from 2.30% in September and 2.52% in October. There was not much change in the annual inflatino rate: it was 2.79% in November compared to 2.83% in September and 2.75 in October. Our trend measure for November was down to 2.39% compared to 2.67% in September and 2.62% in October).

December PCE data is scheduled for release on February 20. The release schedule is scheduled to catch up to its previous pace (just under a one month lag) only by April 30. These continued lags are most unfortunate since the FOMC’s preferred measure of inflation is based on core PCE. In a previous post on CPI inflation, we discussed running a regression of PCE inflation against the contemporaneous measure of CPI inflation, then using the more timely CPI inflation to predict PCE inflation. Overall PCE inflation is predicted to rise on a month-over-month basis (from 2.52 in November to 3.29% in December), fall on an annual basis (2.36 in December compared to 2.72% in November), and our measure of trend is predicted to fall from 2.58% to 2.44%. Predictions for core PCE inflation show similar patterns: the monthly rate rising from 1.94% to 2.75%; the annual falling from 2.79% to 2.37%; and our trend measure falling to 2.11% from 2.39%.

A strong case can be made for keeping the Fed funds rate unchanged. Output growth is very strong and inflation is still above the FOMC’s 2% target. While job creation has weakened, the unemployment rate is quite low by historic standards.

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.