12-month inflation v. 1-month inflation – HubbardOBrienEconomics.com Blog

A Double Dose of Bad Inflation News

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This morning, the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for March. Yesterday, the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index for February as part of its “Personal Income and Outlays” report. Both reports showed that the inflation has worsened. Note that data for the PCE were collected before the beginning of the conflict with Iran.

CPI Inflation jumped to a level well above the Federal Reserve’s 2 percent annual inflation target. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months.

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 3.3 percent in March, up from 2.4 percent in February.
The core inflation rate, which excludes the prices of food and energy, was 2.6 percent in March, up only slightly from 2.5 percent in February.

Headline inflation was equal to the forecast of economists surveyed by the Wall Street Journal but well below the 3.7 percent rate forecast by economists surveyed by FactSet. Core inflation was slightly below the forecast of 2.7 percent in both surveys. Higher energy prices drove the jump in CPI inflation.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) was 10.9 percent in March, up from 3.2 percent in February. Core inflation (the red line) actually decreased to 2.4 in March from 2.6 percent in February.

The following figure emphasizes the role paid by energy prices in causing the jump in inflation. The blue line shows the 1-month inflation rate in all energy prices included in the CPI. The red line shows the 1-month inflation rate in gasoline prices—which was an astounding 907.4 percent.

Did the jump in energy prices pass through to increases in food prices, which are a key concern for many consumers? The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at grocery stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Inflation in both measures fell in March, indicating that they hadn’t (yet?) been affected by rising energy prices. Food at home actually decreased by 1.9 percent in March after increasing by 5.4 percent in February. Food away from home increased 2.9 percent in March, down from 3.9 percent in February.

Turning now to PCE inflation for February. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—with inflation measured as the percentage change in the PCE from the same month in the previous year. Headline PCE inflation was 2.8 percent in February, unchanged from January. Core PCE inflation was 3.0 percent in February, down slight from 3.1 percent in January . Headline inflation was slightly higher and core inflation was equal to the forecast of economists surveyed by FactSet.

The following figure shows 1-month headline PCE inflation and core PCE. Measured this way, headline PCE inflation increased from 3.7 percent in January to 4.6 percent in February. Core PCE inflation declined from 4.8 percent in January to 4.5 percent in February. So, even before the effects of the escalation in energy prices, both 1-month and 12-month PCE inflation are telling the same story of inflation above the Fed’s target—well above in the case of 1-month inflation. These numbers raise significant concern about whether inflation was making progress toward the Fed’s 2 percent target even before the effects of the rise in energy prices.

Fed Chair Jerome Powell has frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices rise, the prices of financial services included in the PCE price index also rise. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 2.7 percent in February, up slightly from 2.6 percent in January. Core market-based PCE inflation was 2.9 percent in February, up slightly from 2.8 percent in January. So, both market-based measures show inflation as stable but well above the Fed’s 2 percent target.

In the following figure, we look at 1-month inflation using these measures. One-month headline market-based inflation increased to 2.1 percent in November from 1.3 percent in October. One-month core market-based inflation fell to 1.3 percent in November from 2.0 percent in October. So, in November, 1-month market-based inflation was at or below the Fed’s annual inflation target. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.

What effect are these troubling inflation reports likely to have on the Fed’s policymaking Federal Open Market Committee (FOMC) at its next meeting on April 28–29—likely Jerome Powell’s last meeting as Fed chair? Economists generally recommend that central banks “look through”—that is, take no action—in response to a supply shock. A supply shock ordinarily results in a one-time increase in the price level, rather than a long-lasting increase in inflation. Fed policymakers, though, are aware that inflation has been running above their 2 percent target for more than five years. The possibility that even a temporary spike in inflation might result in a significant increase in the inflation rate that households and firms expect is a concern. At this point, investors in the federal funds futures market assign only a very small probability to the FOMC raising or lowering its target for the federal funds rate at the next several meetings. Following the next meeting, Powell will give his thoughts on these and other issues at a press conference.

Real GDP Growth Revised Downward as PCE Inflation Is Slightly Lower than Expected

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The Burea of Economic Analysis (BEA) released two reports this morning. One report included a revision of estimated growth in real GDP during the fourth quarter of 2025 from an advance estimate of 1.4 percent—which was already lower than had been expected—to 0.7 percent. Economists surveyed by the Wall Street Journal had expected that fourth quarter growth would be revised upward to 1.5 percent. The BEA’s “Personal Income and Outlays, January 2026” report indicated that the personal consumption expenditures (PCE) price index had increased 2.8 percent over the past year, slightly below the 2.9 percent that economists had expected.

The following figure shows the estimated rates of GDP growth in each quarter beginning with the first quarter of 2021.

As the following figure—taken from the BEA report—shows, consumer spending, investment spending, government spending, and net exports were all revised downward from the original advance estimates. The decline in real government expenditures of –1.0 percent at an annual rate—revised downward from –0.9 percent—was the most important factor contributing to the slowing growth in real GDP during the fourth quarter. The decline in government expenditures is largely attributable to the federal government shutdown, which lasted from October 1, 2025 to November 12, 2025.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including Fed Chair Jerome Powell—often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased by 1.9 percent in the fourth quarter at an annual rate—revised downward from the advance estimate of 2.4 percent—which was well above the 0.9 percent increase in real GDP and slightly above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. Note also that real final sales to private domestic purchasers grew by 2.9 percent in the third quarter, during which real GDP grew by 4.4 percent, and by 1.9 percent in the first quarter of 2025, when real GDP declined by 0.6 percent. So this measure of output is more stable and likely is a better indicator of the underlying growth rate in the economy than is growth in real GDP.

The second BEA report this morning included monthly data on the personal consumption expenditures (PCE) price index for January 2026. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2.0 percent annual inflation target. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices— with inflation measured as the percentage change in the PCE from the same month in the previous year. In January 2026, headline PCE inflation was 2.8 percent, down slightly from 2.9 percent in December 2025 (which was also the inflation rate economists had expected for January 2026). Core PCE inflation in January was 3.1 percent, up slightly from 3.0 in December. Both headline PCE inflation and core PCE inflation remained above the Fed’s 2.0 percent annual inflation target.

Fed Chair Jerome Powell has frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices fall, the prices of financial services included in the PCE price index also fall. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 2.6 percent in January, down from 2.7 percent in December. Core market-based PCE inflation was 2.8 percent in January, up from 2.7 in December. So, both market-based measures show inflation as stable but above the Fed’s 2 percent target.

In the following figure, we look at 1-month inflation using these measures. One-month headline market-based inflation was 3.3 percent in January, down from 4.3 percent in December. One-month core market-based inflation increased to 4.6 percent in January from 4.4 percent in December. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.

Today’s data arrive against the backdrop of the conflict in Iran. According to the AAA, gasoline prices have risen to an average of $3.63 per gallon from $2.94 a month ago. Assuming that the conflict is resolved relatively soon, that increase should have only a transitory effect on inflation. Chair Powell as indicated that he believes that the upward pressure of tariffs on the price level is also still working its way through the economy.

Recent macroeconomic data, along with the effects of tariffs and the conflict in Iran, make it unlikely that members of the Fed’s policymaking Federal Open Market Committee (FOMC) will reduce their target range for the federal funds rate any time soon. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at its March 17–18 meeting decreased only slightly this afternoon to 99.1 percent from rom 99.9 percent yesterday. Investors don’t assign a greater than 50 percent probability to the FOMC cutting its federal funds rate target at any meeting before the meeting on October 27–28.

CPI Inflation Comes in about as Expected

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The news this morning on inflation was ho-hum. The Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for February. Inflation was about as expected and remained moderately above the Federal Reserve’s 2 percent annual inflation target. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months.

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.4 percent in February, unchanged from January.
The core inflation rate, which excludes the prices of food and energy, was 2.5 percent in February, also unchanged from January.

Headline and core inflation were both equal to the forecasts of economists surveyed by the Wall Street Journal.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) was 3.2 percent in February, up from 2.1 percent in January. Core inflation (the red line) decreased to 2.6 percent in February from 3.6 percent in January.

The 1-month and 12-month headline and core inflation rates are telling similar stories, with both measures indicating that the rate of price increase is running somewhat above the Fed’s 2 percent inflation target.

Of course, it’s important not to overinterpret the data from a single month. The figure shows that the 1-month inflation rate is particularly volatile. Also note that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI, to evaluate whether it is hitting its 2 percent annual inflation target. February data on the PCE will be released on Friday.

In recent months, there have been many media reports on how consumers are concerned about declining affordability. Affordability has no exact interpretation but typically means concern about inflation in goods and services that consumers buy frequently.

Many consumers seem worried about inflation in food prices. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at groceries stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Inflation in both measures rose in February. Food at home increased 5.4 percent in February, up from 2.3 percent in January. Food away from home increased 3.9 percent in February, up from 1.8 percent in January. Again, 1-month inflation rates can be volatile.

Gasoline prices, which bounce around a lot from month to month, were up in February. The following figure shows 1-month inflation in gasoline prices. In February the price of gasoline increase at an annual rate of 10.1 percent, after having fallen at an annual rate of 32.2 percent in January. These data were gathered before the increase in gasoline prices caused by the conflict in Iran. The increase in food and gasoline prices helped push headline inflation above core inflation in February.

The affordability discussion has also focused on the cost of housing. The price of shelter in the CPI, as explained here, includes both rent paid for an apartment or a house and “owners’ equivalent rent of residences (OER),” which is an estimate of what a house (or apartment) would rent for if the owner were renting it out. OER is included in the CPI to account for the value of the services an owner receives from living in an apartment or house. The following figure shows 1-month inflation in shelter.

One-month inflation in shelter, which has been trending down since early 2023, increased slightly to 2.8 percent in February from 2.7 in January.

It’s unlikely that this inflation report will have much effect on the views of the members of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC). The FOMC is unlikely to lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting increased only slightly from 98.4 percent yesterday to 99.4 percent this afternoon.

CPI Inflation Comes in Lower than Expected

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There was good news this morning on inflation. (Although maybe not quite good enough to justify the exuberance of the people in the AI-generated image above!) The Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for January. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months. (Today’s report was delayed two days by the recent brief government shutdown.)

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.4 percent in January, down from 2.7 percent in December.
The core inflation rate, which excludes the prices of food and energy, was 2.5 percent in January, down from 2.6 percent in December.

Headline inflation was lower than the forecast of economists surveyed by FactSet, while core inflation was at the forecast rate.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) was 2.1 percent in January, down from 3.6 percent in December. Core inflation (the red line) increased to 3.6 percent in January from 2.8 percent in December.

The 1-month and 12-month headline inflation rates are telling similar stories, with both measures indicating that the rate of price increase is running slightly above the Fed’s 2 percent inflation target. The 1-month core inflation rate shows inflation running well above the Fed’s target.

In recent months, there have been many media reports on how consumers are concerned about declining affordability. These concerns are thought to have contributed to Zohran Mamdani’s victory in New York City mayoral race. Affordability has no exact interpretation but typically means concern about inflation in goods and services that consumers buy frequently.

Many consumers seem worried about inflation in food prices. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at groceries stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Inflation in both measures fell in January from the very high leves of December. Food at home increased 2.3 percent in January, down sharply from up from 7.8 percent in December. Food away from home increased 1.8 percent in January, also down sharply from 8.7 percent in December. Again, 1-month inflation rates can be volatile, but the deceleration in inflation in food prices would be a welcome development if it can be sustained in future months.

There was also good news in the falling price of gasoline. The following figure shows 1-month inflation in gasoline prices. In January the price of gasoline fell at an annual rate of 32.2 percent, after having fallen at an annual rate of 4.0 percent in December. As those values imply, 1-month inflation rates in gasoline are quite volatile.

One-month inflation in shelter decreased to 2.7 percent in January from 4.7 in December, which is also good news if it can be sustained.

What effect have the tariffs that the Trump administration announced on April 2 had on inflation? (Note that many of the tariff increases announced on April 2 have since been reduced.) There has been a debate among policymakers and economists as to whether the full effects of tariff increases have already shown up in prices of final goods. In his press conference following the last meeing of the Fed’s Federal Open Market Committee (FOMC), Fed Chair Jerome Powell indicated that he believed that tariffs would cause further price increases later in the year:

“The U.S. economy has pushed right through [the tariff increases]. Partly that is—that the way that what was implemented was significantly less than what was announced at the beginning. In addition, other countries didn’t retaliate, and, in addition, a good part of it hasn’t been passed through to consumers yet. It’s being—it’s being taken by companies that stand between the consumer and the exporter.”

The following figure shows 12-month inflation in durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, and 12-month inflation in services, which are less likely to be affected by tariffs. In January, inflation in durable goods was 0.4 percent, down from 1.2 percent in December. Inflation in services was 3.2 percent in January, down slightly from 3.3 percent in December. So to this point, upward pressure on goods prices from the tariffs is not reflected in the most recent data.

It’s unlikely that this inflation report will have much effect on the views of the members of the FOMC. The FOMC is unlikely to lower its target for the federal funds rate at its next meeting on March 17–18. The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at that meeting declined only slightly from 91.6 percent yesterday to 90.2 percent after the release of today’s inflation report.

Overall CPI Inflation Is Steady While Inflation in Grocery and Restaurant Prices Increases

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This morning (January 13), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for December. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line). Because of the effects of the federal government shutdown, the BLS didn’t report inflation rates for October or November, so both lines show gaps for those months.

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.7 percent in December..
The core inflation rate, which excludes the prices of food and energy, was 2.6 percent in December.

Headline inflation was the same as economists surveyed by FactSet had forecast, while core inflation was slightly lower.

Calculated as the 1-month inflation rate, headline inflation (the blue line) was 3.8 percent in December, the same as in September which is the most recent month with data. Core inflation (the red line) was up slightly to 2.9 percent in December from 2.8 percent in September.

The 1-month and 12-month inflation rates are telling similar stories, with both measures indicating that the rate of price increase is running moderately above the Fed’s 2 percent inflation target.

Many consumers seem worried about inflation in food prices. The following figure shows 1-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at groceries stores—and the category “food away from home” (the red bar)—primarily food purchased at restaurants. Both measures increased rapidly in December. Food at home increased 9.0 percent in December, up from 4.0 percent in September. Food away from home increased 8.7 percent in December, up from 1.7 percent in September. Again, 1-month inflation rates can be volatile, but these large increases in food prices in December may help explain the recent focus on affordability.

The news on changes in the price of gasoline was better for consumers. The following figure shows 1-month inflation in gasoline prices. In December, the price of gasoline fell by 5.3 percent after a very large 41.9 percent in November. As those values imply, 1-month inflation rates in gasoline are quite volatile.

One-month inflation in shelter jumped in December to 5.0 percent from 2.5 percent in September, although it was down from 5.4 percent in August.

Overall, then, inflation in food and shelter was high in December, although gasoline prices fell in that month.

This CPI report is unlikely to affect the action the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next meeting on January 27–28. Investors who buy and sell federal funds futures contracts assign a very high probability to the FOMC leaving its target for the federal funds rate unchanged at that meeting as well as at its meeting on March 17–18. Investors don’t expect the committee to cut its target range for the federal funds rate until its June 16–17 meeting. (We discuss the futures market for federal funds in this blog post.)

By the time of the FOMC’s June meeting, the committee will have several additional months’ data on inflation, employment, and output. Jerome Powell’s term as Fed chair will end on May 15, so presumably the FOMC will have a new chair at that meeting. (This blog post from yesterday includes Powell’s response to the news that he is under investigation by the U.S. Department of Justice and a statement by Glenn and other economists who have served in government objecting to the investigation because they believe that it will undermine the independence of the Fed. We discuss the issue of Fed independence in Macroeconomics, Chapter 17 (Economics, Chapter 27) and Money, Banking, and the Financial System, Chapter 13.)

PCE Inflation Increases Slightly in September

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Today (December 5), the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index for September as part of its “Personal Income and Outlays” report. Release of the report was delayed by the federal government shutdown.

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—with inflation measured as the percentage change in the PCE from the same month in the previous year. In September, headline PCE inflation was 2.8 percent, up slightly from 2.7 percent in August. Core PCE inflation in September was also 2.8 percent, down slightly from 2.9 percent in August. Both headline and core PCE inflation were equal to the forecast of economists surveyed.

Fed Chair Jerome Powell has frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices fall, the prices of financial services included in the PCE price index also fall. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 2.6 percent in September, up from 2.4 percent in August. Core market-based PCE inflation was 2.6 percent in September, unchanged from August. So, both market-based measures show inflation as stable but above the Fed’s 2 percent target.

In the following figure, we look at 1-month inflation using these measures. One-month headline market-based inflation increase sharply to 3.7 percent in September from 2.6 percent in August. One-month core market-based inflation increased to 2.7 percent in September from 2.0 percent in August. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.

Data on real personal consumption expenditures were also included in this report. The following figure shows compound annual rates of growth of real real personal consumptions expenditures for each month since January 2023. Measured this way, the growth in real personal consumptions expenditures slowed sharply in September to 0.5 percent from 3.0 percent in August.

Does the slowing in consumptions spending indicate that real GDP may have also grown slowly in the third quarter of 2025? Economists at the Federal Reserve Bank of Atlanta prepare nowcasts of real GDP. A nowcast is a forecast that incorporates all the information available on a certain date about the components of spending that are included in GDP. The Atlanta Fed calls its nowcast GDPNow. As the following figure from the Atlanta Fed website shows, today the GDPNow forecast—taking into account today’s data on real personal consumption expenditures—is for real GDP to grow at an annual rate of 3.5 percent in the third quarter, which reflects continuing strong growth in other measures of output.

In a number of earlier blog posts, we discussed the policy dilemma facing the Fed. Despite the Atlanta Fed’s robust estimate of real GDP growth, there are some indications that the labor market may be weakening. For instance, earlier this week ADP estimated that private sector employment declined by 32,000 jobs in November. (We discuss ADP’s job estimates in this blog post.) As the Fed’s policy-making Federal Open Market Committee (FOMC) prepares for its next meeting on December 9–10, it has to balance guarding against a potential decline in employment with concern that inflation has not yet returned to the Fed’s 2 percent annual target.

If the committee decides that inflation is the larger concern, it is likely to leave its target range for the federal funds rate unchanged. If it decides that weakness in the labor market is the larger concern, it is likely to reduce it target range by 0.25 percentage point (25 basis points). Statements by FOMC members indicate that opinion on the committee is divided. In addition, the Trump administration has brought pressure on the committee to cut its target rate.

One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) Investors’ expectations have been unusually volatile during the past two months as new macroeconomic data or new remarks by FOMC members have caused swings in the probability that investors assign to the committee cutting the target range.

As of this afternoon, investors assigned a 87.2 percent probability to the committee cutting its target range for the federal funds rate by 25 basis points to 3.50 percent to 3.75 percent at its December meeting. At the December meeting the committee will also release its Summary of Economic Projections (SEP) giving members forecasts of future values of the inflation rate, the unemployment rate, the federal funds rate, and the growth rate of real GDP. The SEP, along with Fed Chair Powell’s remarks at his press conference following the meeting, should provide additional information on the monetary policy path the committee intends to follow in the coming months.

FOMC Meeting Results in Expected Rate Cut

Photo of Federal Reserve Chair Jerome Powell from federalreserve.gov

Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) occurred against a backdrop of a shutdown of the federal government that has delayed release of most government economic data. (We discuss the government shutdown here, here, and here.)

As most observers had expected, the committee decided today to lower its target for the federal funds rate from a range of 4.00 percent to 4.25 percent to a range of 3.75 percent to 4.oo percent—a cut of 0.25 percentage point, or 25 basis points. The members of the committee voted 10 to 2 for the 25 basis point cut with Governor Stephen Miran dissenting because he preferred a 50 basis point cut and Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, dissenting because he preferred that the target range be left unchanged at this meeting.

The following figure shows, for the period since January 2010, the upper bound (the blue line) and the lower bound (the green line) for the FOMC’s target range for the federal funds rate, as well as the actual values of the federal funds rate (the red line). Note that the Fed has been successful in keeping the value of the federal funds rate in its target range. (We discuss the monetary policy tools the FOMC uses to maintain the federal funds rate in its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)

During his press conference following the meeting, Fed Chair Jerome Powell made news by stating that a further cut in the target rate at the FOMC’s meeting on December 9–10 is not a foregone conclusion. This statement came as a surprise to investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As of yesterday, investors has assigned a probability of 90.5 percent to the committee cutting its target range by another 25 basis points at the December meeting. Today that probability dropped to zero. Instead investors now assign a probability of 67.8 percent to the target remaining unchanged at that meeting, and a probability of 32.2 percent of the committee raising its target by 25 basis points.

Powell also indicated that he believes that the recent increase in inflation was largely due to the effects of the increase in tariff rates that the Trump administration began implementing in April. (We discuss the recent data on inflation in this post.) Powell indicated that committee members expect that the tariff increases will cause a one-time increase in the price level, rather than a long-term increase in the inflation rate. As a result, he said that the shift in the “balance of risks” caused the committee to believe that cutting the target for the federal funds rate was warranted to avoid the possibility of a significant rise in the unemployment rate.

In discussing inflation, Powell highlighted three aspects of the recent CPI report: inflation in goods, inflation in shelter, and inflation in services not including shelter. (The BLS explains is measurement of shelter here.) The following figure shows inflation in each of those categories, measured as the percentage increase from the same month in the previous year. Inflation in goods (the blue line) has been trending up, reflecting the effect of increased tariffs rates. Inlation in shelter (the red line) and in services minus shelter (the green line) have generally been trending downward. Powell noted that the decline in inflation in shelter has been slower than most members of the committee had expected.

Still, Powell argued that with the downward trend in services, once the temporary inflation in goods due to the effects of tariffs had passed through the economy, inflation was likely to be close the Fed’s 2 percent annual target. He thought this was particularly likely to be true because even after today’s cut, the federal funds rate was “restrictive” because it remained above its long-run nominal and real values. A restrictive monetary policy will slow spending and inflation.

In the following figure, we look at the 1-month inflation rates—that is, the annual inflation rates calculated by compounding the current month’s rates over an entire year—for the same three categories. Calculated as the 1-month inflation rate, goods inflation (the blue line) was running at a very high 6.6 percent in September. inflation in shelter (the red line) had declined to 2.5 per cent in September. Inflation in services minus shelter rose slightly in September to 2.1 percent.

Assuming that the shutdown of the federal government ends within the next few weeks, members of the FOMC will have a great deal of data on inflation, real GDP growth, and employment to consider before their next meeting in December.

CPI Inflation for September Slightly Below Forecasts but Still Above Target

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As we’ve noted in recent blog posts (here and here), the shutdown of the federal government has interrupted the release of government data, including the “Employment Situation” report prepared monthly by the Bureau of Labor Statistics (BLS). The federal government made an exception for the BLS report on the consumer price index (CPI) because annual cost-of-living increases in Social Security payments are determined by the average inflation rate in the CPI during July, August, and September.

Accordingly, today (October 24), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for September. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 3.0 percent in September, up from 2.9 percent in August.
The core inflation rate, which excludes the prices of food and energy, was also 3.0 percent in September, down slightly from 3.1 percent in August.

Headline inflation and core inflation were both slightly lower than the 3.1 rate for both measures that economists had expected.

In the following figure, we look at the 1-month inflation rates for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) declined from the very high rate of 4.7 percent in August to the still high rate of 3.8 percent in September. Core inflation (the red line) declined from 4.2 percent in August to 2.8 percent in September.

The 1-month and 12-month inflation rates are both indicating that inflation remains well above the Fed’s 2 percent annual inflation target in September. Core inflation—which is often a good indicator of future inflation—in particular has been running well above target during the last three months.

Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that many of the tariff increases announced on April 2 have since been reduced.) The following figure shows 12-month inflation in durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, all core goods, and core services. Services are less likely to be affected by tariffs.. To make recent changes clearer, we look only at the months since January 2022. In August, inflation in durable goods declined slightly to 1.8 percent in September from 1.9 percent in August. Inflation in core goods was unchanged in September at 1.5 percent. Inflation in core services fell slightly in September to 3.5 percent from 3.6 percent in August.

The following figure shows 1-month inflation in the prices of these products, which may makes clearer the effects of the tariff increases. In September, durable goods inflation was a high 4.0 percent, although down from 5.1 percent in August. Core goods inflation in September was 2.7 percent, down from 3.4 percent in August. Core service inflation was 2.9 percent in August, down from 4.3 percent in August.

To better estimate the underlying trend in inflation, some economists look at median inflation and trimmed mean inflation.

Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates.
Trimmed-mean inflation drops the 8 percent of goods and services with the highest inflation rates and the 8 percent of goods and services with the lowest inflation rates.

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.2 percent in September, down slightly from 3.3 August. Twelve-month median inflation (the red line) 3.5 percent in September, down slightly from 3.6 in August.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation declined from 3.2 percent in August to 2.4 percent in September. One-month median inflation declined from 3.4 percent in August to 2.4 percent in September. These data are consistent with the view that inflation is still running above the Fed’s 2 percent target.

With inflation running above the Fed’s 2 percent annual target, we wouldn’t typically expect that the Fed’s policymaking Federal Open Market Committee (FOMC) would cut its target for the federal funds rate at its October 28–29 meeting. At this point, though, it seems likely that the FOMC will “look through” the higher inflation rates of the last few months because the higher rates may be largely attributable to one-time price increases caused by tariffs. Committee members have signaled that they are likely to cut their target for the federal funds rate by 0.25 percentage point (25 basis points) at the conclusion of next week’s meeting.

This morning, investors who buy and sell federal funds futures contracts assign a probability of 96.7 percent to the FOMC cutting its target for the federal funds rate at that meeting by 25 basis points from its current target range of 4.00 percent to 4.25 percent. Investors assign a 95.9 percent probability of the committee cutting its target by an additional 25 basis points to 3.50 percent to 3.75 percent at its December 9–10 meeting. If persistently high inflation rates reflect more than just the temporary effects of tariffs, these rate cuts will make it unlikely that the Fed will reach its 2 percent inflation target anytime soon.

CPI Inflation Worsens, as Expected

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Today (September 11), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for August. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.9 percent in August, up from 2.7 in July.
The core inflation rate, which excludes the prices of food and energy, was 3.1 percent in August, up slightly from 3.0 percent in July.

Headline inflation and core inflation were both the same as economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) jumped from 2.4 percent in July to 4.7 percent in August. Core inflation (the red line) increased from 3.9 percent in July to 4.2 percent in August.

The 1-month and 12-month inflation rates are both indicating that inflation accelerated in August. Core inflation—which is often a good indicator of future inflation—in particular has been running well above the Fed’s 2 percent inflation target during the last two months.

Core inflation had been running significantly higher than headline inflation in the past few months because gasoline prices had generally been falling since February. Gasoline prices turned around in August, however, increasing at a 25.5 percent annual rate. As shown in the following figure, 1-month inflation in gasoline prices moves erratically—which is the main reason that gasoline prices aren’t included in core inflation.

Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that many of the tariff increases announced on April 2 have since been reduced) The following figure shows 12-month inflation in durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, and services, which are less likely to be affected by tariffs.. To make recent changes clearer, we look only at the months since January 2022. In August, inflation in durable goods increased to 1.9 percent from 1.2 percent in July. Inflation in services in August was 3.8 percent, unchanged from July.

The following figure shows 1-month inflation in the prices of these products, which may make the effects of tariffs clearer. In August, durable goods inflation was 5.1 percent up from 4.5 percent in July. Service inflation was 3.9 percent in August, down slightly from 4.0 percent in July. Inflation in goods and services both running well above 2 percent is not good news for inflation falling back to the Fed’s 2 percent target in the near future.

To better estimate the underlying trend in inflation, some economists look at median inflation and trimmed mean inflation.

Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates.
Trimmed-mean inflation drops the 8 percent of goods and services with the highest inflation rates and the 8 percent of goods and services with the lowest inflation rates.

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.3 percent in August, up slightly from 3.2 July. Twelve-month median inflation (the red line) 3.6 percent in August, unchanged from July.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation rose from 2.9 percent in July to 3.2 percent in August. One-month median inflation remained unchanged at 3.4 percent in August. These data are consistent with the view that inflation is running above the Fed’s 2 percent target.

The CPI inflation data combined with the recent jobs data (which we discuss here and here), indicate that the U.S. economy may be entering a period of stagflation—a combination of rising inflation with falling, or stagnating, output. Stagflation poses a policy dilemma for the Fed’s policymaking Federal Open Market Committee (FOMC) because cutting its target for the federal funds rate to increase economic growth and employment may worsen inflation. At this point, it seems likely that the FOMC will “look through” this month’s rising inflation because it may be largely due to one-time price increases caused by tariffs. Committee members have signaled that they are likely to cut their target for the federal funds rate by 0.25 percent (25 basis points) at the conclusion of their meeting on September 16–17 and again at the conclusion of the following meeting on October 28–29.

PCE Inflation Is Steady, but Still Above the Fed’s Target

On August 29, the Bureau of Economic Analysis (BEA) released data for July on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2017, with inflation measured as the percentage change in the PCE from the same month in the previous year. In July, headline PCE inflation was 2.6 percent, unchanged from June. Core PCE inflation in July was 2.9 percent, up slightly from 2.8 percent in June. Headline PCE inflation and core PCE inflation were both equal to what economists surveyed had forecast.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, headline PCE inflation fell from 3.5 percent in June to 2.4 percent in July. Core PCE inflation increased slightly from 3.2 percent in June to 3.3 percent in July. So, both 1-month PCE inflation estimates are above the Fed’s 2 percent target, with 1-month core PCE inflation being well above target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. In addition, these data may reflect higher prices resulting from the tariff increases the Trump administration has implemented. Once the one-time price increases from tariffs have worked through the economy, inflation may decline. It’s not clear, however, how long that may take and it’s likely that not all the effects of the tariff increases on the price level are reflected in this month’s data.

As usual, we need to note that Fed Chair Jerome Powell has frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices fall, the prices of financial services included in the PCE price index also fall. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 2.3 percent in July, unchanged from June. Core market-based PCE inflation was 2.6 percent in July, also unchanged from June. So, both market-based measures show inflation as stable but above the Fed’s 2 percent target.

In the following figure, we look at 1-month inflation using these measures. One-month headline market-based inflation declined sharply to 1.1 percent in July from 4.1 percent in June. One-month core market-based inflation also declined sharply to 2.1 percent in July from 3.8 percent in June. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate. Still, looking at 1-month inflation gives us a better look at current trends in inflation, which these data indicate is slowing significantly.

As we noted earlier, some of the increase in inflation is likely attributable to the effects of tariffs. The effect of tariffs are typically seen in goods prices, rather than in service prices because tariffs are levied primarily on imports of goods. As the following figure shows, one-month inflation in goods prices jumped in June to 4.8 percent, but then declined sharply to –1.6 in July. One-month inflation in services prices increased from 2.9 percent in June to 4.3 percent in July. Clearly, the 1-month inflation data—particularly for goods—are quite volatile.

Finally, these data had little effect on the expectations of investors trading federal funds rate futures. Investors assign an 86.4 percent probability to the Federal Open Market Committee (FOMC) cutting its target for the federal funds rate at its meeting on September 16–17 by 0.25 percentage point (25 basis points) from its current range of 4.25 percent to 4.5o percent. There has been some speculation in the business press that the FOMC might cut its target by 50 basis points at that meeting, but with inflation remaining above target, investors don’t foresee a larger cut in the target range happening.