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

New BEA Data Releases Show Higher Growth and Lower Inflation than Expected

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The Bureau of Economic Analysis (BEA) released two reports this morning (September 30). One report indicated that economic growth was higher in the second quarter of 2026 than the BEA had previously estimated. The other report indicated that inflation as measured by the percentage increase in personal consumption expenditures (PCE) price index was lower than expected.

The BEA’s latest estimate is that real GDP increased at an annual rate of 2.2 percent in the second quarter (May, June, and July) of 2026. That is a sharp upward revision of the BEA’s previous estimate that real GDP had increased at an annual rate of 1.5 percent in the second quarter. The following figure from the report shows that upward revisions of investment, consumer spending, and government spending account for the upward revision of real GDP growth. The figure shows the BEA’s advance (original estimate) and two subsequent revised estimates. The BEA revises its estimates of real GDP growth as over time as it collects more complete and accurate data on growth in the components of GDP.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, Federal Reserve policymakers 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 at an annual rate of 4.6 percent in the second quarter, revised upward from 4.4 percent. The growth rate in real final sales to domestic purchasers was more than twice the growth rate of real GDP, as well as much higher than the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. So estimated growth in real final sales to domestic purchasers indicates that the U.S. economy is expanding more rapidly than is indicated by estimated growth in real GDP. Typically, growth in real final sales to domestic purchasers is steadier than growth in real GDP and is likely a better indicator of the underlying growth rate in the economy.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. As we noted in an earlier blog post, Fed Chair Kevin Warsh indicated in his press conference following the July meeting of the Federal Open Market Committee (FOMC) that the committee intended to continue using the PCE price index as its gauge of inflation, although that decision would be revisited early next year. Some analysts have interpreted Warsh’s statement that the decision would be revisited next year as an indication that he favored moving to a measure that would show lower rates of inflation than those shown by the PCE.

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 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In August, headline PCE inflation was 3.4 percent, unchanged from July. Core PCE inflation in August was 3.0 percent, also unchanged from July. Headline and core PCE inflation were both lower than forecast by economists surveyed by FactSet. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation increased from 0.6 in July to 3.8 percent in August. Core PCE inflation increased from 1.5 percent in July to 3.0 percent in August. In contrast with the 12-month inflation rates, the 1-month inflation rates show noticeable acceleration in inflation during August. Of course, it’s important not to overinterpret the data from a single month.

Fed policymakers believe 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. Former Fed Chair Jerome 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 3.5 percent in August, up slightly from 3.4 percent July. Core market-based PCE inflation was 3.0 percent in August, up from 2.9 percent in July. So, both market-based measures show inflation in August remaining well above the Fed’s 2 percent target.

Fed Chair Kevin Warsh argued in testimony at his confirmation hearing before the Senate that the Fed should stop relying on headline PCE inflation: “The measures [of inflation] I prefer are looking at things that are called trimmed averages. We take out all of the tail-risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy.”

Trimmed-mean PCE inflation drops the 31 percent of goods and services with the highest inflation rates and the 24 percent of goods and services with the lowest inflation rates. A closely related measure, median PCE inflation, is calculated by listing the inflation rate in each individual good or service included in the PCE and identifying 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.

The following figure shows 12-month headline PCE inflation the (blue line), core PCE inflation (the red line) and trimmed-mean PCE inflation (the green line). Trimmed-mean PCE inflation in August was 2.2 percent, well below both headline and core PCE inflation.

The following figure from the website of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In August, median PCE inflation was 2.6 percent, which was down from 2.7 percent in July. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data releases appear to have caused of investors who buy and sell federal funds futures contracts to believe that the Federal Open Market Committee (FOMC) is now less likely to raise its target for the federal funds rate at the committee’s next meeting on October 27–28. Trading on the federal funds futures market this afternoon implies that the probability of a target rate increase at that meeting is 39.3 percent, down from a probability of 50.9 percent yesterday.

No Sign of Cooling Inflation in September CPI Report

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Today’s report from the Bureau of Labor Statistics (BLS) on the consumer price index (CPI) for August was eagerly awaited by economists and policy analysts. As we discuss in Macroeconomics, Chapter 15 (Economics, Chapter 25), monetary policy affects the economy with, in the words of Nobel Laureate Milton Friedman, “long and variable lags.” As a result, most economists agree that the Federal Reserve should not attempt to “fine tune” the economy by responding to each government release of macroeconomic data.

There are some instances, however, including the present, when the Fed’s policymaking Federal Open Market Committee (FOMC) appears to be uncertain as to whether a change in policy is needed. As a result, there was a widespread expectation that if today’s report indicated that inflation is slowing, the FOMC would likely leave its target for the federal funds rate unchanged at its meeting on Tuesday and Wednesday of next week. But if the report didn’t indicate that inflation is slowing, the committee would likely raise its target. The report gave few indications that inflation is slowing.

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 3.4 percent in August, the same as in July.
The core inflation rate, which excludes the prices of food and energy, was 2.4 percent in August, down from 2.5 in July.

Headline inflation was slightly higher, and core inflation was equal, to the forecasts of economists surveyed by FactSet. (Note that because of last year’s federal government shutdown, inflation data for October 2025 are not available.)

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 (the blue line) was 4.6 percent In August, up from 0.9 percent in July. Core inflation (the red line) was 3.5 percent in August, up from 2.6 percent in July.

The following figure illustrates the role played by energy prices in contributing to the large swings in the monthly inflation rate since the conflict in Iran began at the end of February. The red line shows the 1-month inflation rate in all energy prices included in the CPI. Inflation in energy prices, which had declined at an annual rate of 16.4 percent in July, increased at an annual rate of 28.3 percent in August. The blue line shows the 1-month inflation rate in gasoline prices, which had declined at an annual rate of 29.4 percent in July, increased at an annual rate of 58.3 percent in August.

There had been a fear that the rise in energy prices that began in March would 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 in the category “food away from home” (the red bar)—primarily food purchased at restaurants. Grocery prices, which had declined at annual rate of 0.9 percent in July, increased at an annual rate of 0.4 percent in August. Food prices away from home increased 3.1 percent in August, down from 3.9 percent in July. To this point, increases in energy prices seem to have had some effect on grocery prices and restaurant prices, although the extent of the effect is unclear.

Fed Chair Kevin Warsh has indicated that he favors measures of the inflation rate that exclude particularly small or particularly large changes in the prices of some goods or services—so-called outliers. Median CPI, which is compiled monthly by economists at the Federal Reserve Bank of Cleveland, is calculated by ranking the price changes of every good or service in the index from the largest price change to the smallest price change, and then choosing the price change in the middle. The idea is to eliminate the effect on measured inflation of any short-lived events that cause the prices of some goods and services to be particularly high or particularly low. Economists at the Cleveland Fed have conducted research that shows that, in their words, “the median CPI provides a better signal of the underlying inflation trend than either the all-items CPI or the CPI excluding food and energy. The median CPI is even better at forecasting [personal consumption expenditures] PCE inflation in the near and longer term than the core PCE price index.”

Trimmed-mean inflation, also compiled by economists at the Cleveland Fed, excludes the highest 8 percent of price changes and the lowest 8 percent. The following figure shows 1-month trimmed mean (the blue line) and median (the red line) CPI inflation. Trimmed-mean inflation was 2.7 percent in August, unchanged from July. Median inflation was 2.1 percent in August, down from 3.1 percent in July. So these measures of inflation are both lower than the conventional headline and core CPI inflation measures, although as the figure shows, both measures are volatile.

Note that the Fed uses the 12-month change in the personal consumption expenditures (PCE) price index, not the change in the CPI, when gauging whether it is hitting its 2 percent annual inflation target. Historically, PCE inflation has been about 0.4 percentage points to 0.5 percentage points lower than CPI inflation. The Bureau of Economic Analysis (BEA) won’t release its estimate of August PCE inflation until September 30, after the next FOMC meeting.

Today’s report showing that inflation remains persistently above the Fed’s 2 percent annual target, following last week’s jobs report showing an unexpectedly large increase in employment, has likely raised the chance that Federal Reserve policymakers will increase their target range for the federal funds rate from the current 3.50 percent to 3.75 percent by o.25 percentage points (or 25 basis points) at the next meeting of the FOMC on September 15–16. Trading in the federal funds futures market this afternoon indicates that investors assign a 86.5 percent probability to the FOMC raising its target range at that meeting, which is up from a 72.4 probability yesterday. Trading indicated that investors assign a 74.5 percent probability to the committee increasing its target range by at least 50 basis points by the end of the year, up from 64.6 percent yesterday and from 44.7 percent one week ago.

New BEA Releases Show Steady Inflation and Higher Output Growth

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The Bureau of Economic Analysis (BEA) released two reports this morning (August 26): “GDP (Second Estimate) and Corporate Profits, 2nd Quarter 2026” and “Personal Income and Outlays, July 2026.” The BEA’s second estimate is that real GDP grew at annual rate of 1.5 percent in second quarter of 2026, which is unchanged from the BEA’s initial estimate released last month and is equal to the forecast of economists surveyed by the Wall Street Journal.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, Federal Reserve policymakers 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 at an annual rate of 4.2 percent in the second quarter, up from 3.9 percent in last month’s initial estimate. The growth rate in real final sales to domestic purchasers was more than twice the rate of growth of real GDP, as well as far above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. So growth in real final sales to domestic purchasers indicates that the U.S. economy is expanding rapidly, as opposed to the much weaker growth shown by real GDP data. Typically, growth in real final sales to domestic purchasers is steadier than growth in real GDP and is likely a better indicator of the underlying growth rate in the economy.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. As we noted in a recent blog post, Fed Chair Kevin Warsh indicated in his press conference following the July meeting of the Federal Open Market Committee (FOMC) that the committee intended to continue using the PCE price index as its gauge of inflation, although that decision would be revisited early next year. Warsh may have intended this statement to reassure financial markets that there would be continuity in the Fed’s measure of inflation. However, some investors appear to have interpreted Warsh’s statement that the decision would be revisited next year as an indication that he favored moving to a measure that would show lower rates of inflation than those shown by the PCE.

In other words, some investors believe that in the future the FOMC might be willing to accept higher levels of PCE inflation. Perhaps in response to this interpretation, the yield on the 30-year U.S. Treasury bond increased in the days following Warsh’s press conference. Higher expected inflation can lead to lower bond prices and higher bond yields. (We discuss this point in Money, Banking, and the Financial System, Chapter 5, which is now available in a new edition.) Warsh is scheduled to speak on Friday at the Kansas City Fed’s annual Jackson Hole Economic Policy Symposium. His speech will cover his views on the current state of the economy and may give clues as to the future monetary policy actions he may support.

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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 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In July, headline PCE inflation was 3.7 percent, unchanged from June. Core PCE inflation in July was 3.3 percent, also unchanged from June. Headline PCE inflation was slightly higher than forecast by economists surveyed by the Wall Street Journal, while core PCE was equal to the forecast. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation increased from –1.3 in June to 1.9 percent in July. Core PCE inflation increased from 1.8 percent in June to 3.0 percent in July. Headline inflation was very low in June—prices actually fell during the month—largely because of falling gasoline prices. Today’s data show here was a noticeable acceleration in inflation during July. Of course, it’s important not to overinterpret the data from a single month.

Headline market-based PCE inflation was 3.5 percent in July, unchanged from June. Core market-based PCE inflation was 3.0 percent in July, also unchanged from June. So, both market-based measures show inflation in July remaining well above the Fed’s 2 percent target.

The following figure shows headline PCE inflation the (red line), core PCE inflation (the brown line) and trimmed-mean PCE inflation (the blue line). Trimmed-mean PCE inflation in July was 2.3 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In July, median PCE inflation was 2.7 percent, which was unchanged from June. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data releases appear to have had little effect on the views of investors who buy and sell federal funds futures contracts. These investors believe that the FOMC will likely not raise its target for the federal funds rate at its meeting on September 15–16 as some analysts have speculated. The probability that the committee will leave its target range unchanged at 3.50 percent to 3.75 percent declined only slightly from 60.4 percent yesterday to 59.9 percent this afternoon. Investors assign a probability of 54.7 percent to the FOMC raising its target range by o.25 percentage points (25 basis points) at its meeting on October 27–28.

As Expected, CPI Inflation Falls Slightly in July

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Today (August 12), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for July. Lower energy and grocery prices contributed to a slight decline in the inflation rate in July compared with June.

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 3.4 percent in July, down from 3.5 percent in June.
The core inflation rate, which excludes the prices of food and energy, was 2.5 percent in July, down from 2.6 in June.

Headline inflation and core inflation were both equal to the forecasts of economists surveyed by FactSet. (Note that because of last year’s federal government shutdown, inflation data for October 2025 are not available.)

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, both headline (the blue line) and core inflation (the red line) increased in July from the negative values in June. That is, the U.S. economy experienced deflation in June because the price level, measured by the CPI and by the CPI less food and energy prices, fell in that month.

In July, 1-month headline CPI inflation was 0.9 percent and 1-month core CPI inflation was 2.6 percent.

The following figure illustrates the role played by energy prices in contributing to the large swings in the monthly inflation rate since the conflict in Iran began at the end of February. The red line shows the 1-month inflation rate in all energy prices included in the CPI. Inflation in energy prices, which had increased at annual rate of 245 percent in March, declined at an annual rate of 16.4 percent in July. The blue line shows the 1-month inflation rate in gasoline prices, which in March had spiked to more than 900 percent measured at an annual rate, declined at an annual rate of 29.4 percent in July. A return to full-scale hostilities in the Middle East would increase oil prices, which would likely lead to an increase in the U.S. inflation rate.

There had been a fear that the rise in energy prices that began in March would 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 grocery prices, which increased 2.3 percent in June, declined 0.9 percent in July. Inflation in food prices away from home increased from 2.8 percent in June to 3.8 percent in July. To this point, increases in energy priced do not seem to have caused a significant increase in either grocery prices or restaurant prices.

Today’s relatively good inflation report, following last week’s report showing an unexpected decline in employment, has likely reduced the chance that Federal Reserve policymakers will increase their target for the federal funds rate at the next meeting of the Federal Open Market Committee (FOMC) on September 15–16. In trading in the federal funds futures market this afternoon, investors assigned a 62.1 percent probability to the FOMC keeping its target unchanged at that meeting, which was up from a 51.6 probability yesterday. Traders assign a 53.2 percent probability to the committee increasing its target at its October 27–28 meeting, down from 62.2 percent yesterday.

It’s worth noting, however, that inflation is still running above the Federal Reserve’s 2 percent annual inflation target. In testimony before Congress in a hearing on his nomination as Fed Chair, Kevin Warsh cautioned that good news in a single month’s inflation report should be treated with caution. Warsh has intentionally moved away from discussing the circumstances under which monetary policy might change in the future—so-called forward guidance. (We discuss forward guidance in Macroeconomics, Chapter 15 (Economics, Chapter 25)). Uncertainty about actions the FOMC may take during its three remaining meeting this year remains high.

New BEA Releases Show Slower Growth Than Expected and Lower Inflation

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The Bureau of Economic Analysis (BEA) released two reports this morning (July 30): “GDP (Advance Estimate), 2nd Quarter 2026” and “Personal Income and Outlays, June 2026.” The BEA’s initial—or advance—estimate is that real GDP grew in the second quarter of 2026 at annual rate of 1.5 percent, down from an annual rate of 2.1 percent in the first quarter. Economists surveyed by the Wall Street Journal had forecast that real GDP would grow at a rate of 1.8 percent in the second quarter. The following figure shows the BEA’s estimated rates of real GDP growth in each quarter beginning with the first quarter of 2022.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including former 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 at an annual rate of 3.9 percent in the second quarter, more than twice the rate of growth of real GDP, as well as far above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. So growth in real final sales to domestic purchasers indicates that the U.S. economy is expanding rapidly, as opposed to the much weaker growth shown by real GDP data. Typically, growth in real final sales to domestic purchasers is steadier than growth in real GDP and is likely a better indicator of the underlying growth rate in the economy.

There has been much discussion in the media of the surge in spending on new data centers to power artificial intelligence programs. This surge is reflected in following figure, which shows real domestic investment in information processing equipment. This category of investment spending has increased more than 40 percent since the fourth quarter of 2024.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. As we noted in a blog post yesterday, Fed Chair Kevin Warsh indicated in his press conference following the meeting of the Federal Open Market Committee (FOMC) that the committee intended to continue using the PCE price index as its gauge of inflation, although that decision would be revisited early next year. Warsh may have intended this statement to reassure financial markets that there would be continuity in the Fed’s measure of inflation. However, some investors appear to have interpreted Warsh’s statement that the decision would be revisited next year as an indication that he favored moving to a measure that would show lower rates of inflation than those shown by the PCE.

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 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In June, headline PCE inflation was 3.7 percent, down from 4.1 percent in May. Core PCE inflation in June was 3.3 percent, down slightly from 3.4 percent in May. Headline and core PCE inflation were both equal to the forecasts of economists surveyed by the Wall Street Journal. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows monthly PCE inflation and monthly core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation declined from 5.7 percent in May to –1.3 percent in June; in other words, consumer prices fell in June. Core PCE inflation fell from 4.1 in May to 1.6 percent in June. Even leaving aside the effect of falling gasoline prices on headline PCE, these data show that in June there was a noticeable deceleration in inflation. Of course, it’s important not to overinterpret the data from a single month.

Former Fed Chair Jerome Powell 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 3.5 percent in May, down from 4.0 percent in May. Core market-based PCE inflation was 3.0 percent in June, down from 3.2 percent in May. So, both market-based measures, although lower than the full PCE measures, show inflation in June remaining well above the Fed’s 2 percent target.

The following figure shows headline PCE inflation the (blue line), core PCE inflation (the red line) and trimmed-mean PCE inflation (the brown line). Trimmed-mean PCE inflation in June was 2.2 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In June, median PCE inflation was 2.7 percent, also below both headline and core inflation. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data releases appear to have reinforced the view of investors who buy and sell federal funds futures contracts that the FOMC will raise its target for the federal funds rate by o.25 at its meeting on September 15–16. That probability increased from 58.3 percent yesterday to 65.4 percent this afternoon.

CPI Inflation Comes in Below Expectations

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Today (July 14), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for June. In May, higher energy prices caused by the conflict in Iran contributed to inflation increasing to the highest rate in more than three years. In June, as energy prices decreased, inflation experienced the largest one-month decrease since April 2020.

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 3.5 percent in June, down from 4.2 percent in May.
The core inflation rate, which excludes the prices of food and energy, declined from 2.8 percent in May to 2.6 percent in June.

Headline inflation and core inflation were both well below the forecasts of economists surveyed by FactSet. (Note that because of last year’s federal government shutdown, inflation data for October and November 2025 are not available.)

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, both headline (the blue line) and core inflation (the red line) were negative in June. That is, the U.S. economy experienced deflation last month because the price level, measures by the CPI and by the CPI less food and energy prices, fell in June.

The following figure illustrates the role played by energy prices in causing the large swings in the monthly inflation rate since the conflict in Iran began at the end of February. The red line shows the 1-month inflation rate in all energy prices included in the CPI. Inflation in energy prices, which had increased at annual rate of 245 percent in March, fell at annual rate of 50.6 percent in June. The blue line shows the 1-month inflation rate in gasoline prices, which in March had spiked to more than 900 percent measured at an annual rate, fell at an annual rate of 70.6 percent in June. The recent escalation in the conflict in Iran has increased oil prices, which will likely lead to an increase in the inflation rate in July.

There has been a fear that the rise in energy prices that began in March would 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 grocery prices increased from 0.8 percent in May to a still fairly low 2.3 percent in June. Inflation in food prices away from home fell from 3.7 percent in May to 2.8 percent in June. To this point, increases in energy priced do not seem to have had much effect on grocery prices or on restaurant prices.

The unexpectedly large decline in inflation in today’s report has likely reduced the chance that Federal Reserve policymakers will increase their target for the federal funds rate at the next meeting of the Federal Open Market Committee (FOMC) on July 28–29. In trading in the federal funds futures market this morning, investors assigned a 83.4 percent probability to the FOMC keeping its target unchanged, which was up sharply from a 58.3 probability yesterday. Traders assign a 61.3 percent probability to the committee increasing its target at its September 15–16 meeting, down from 75.1 percent yesterday.

In testimony before Congress today after the CPI report was released, Fed Chair Kevin Warsh cautioned that good news in a single month’s inflation report should be treated with caution: “There might be some who look at today’s data and say ‘mission accomplished.’ That is not my view.”

New BEA Releases Show Faster Growth and Higher Inflation

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The Bureau of Economic Analysis (BEA) released two reports this morning (June 25): “GDP (Third Estimate), Industries, Corporate Profits, State GDP, and State Personal Income, 1st Quarter 2026” and “Personal Income and Outlays, May 2026.” The BEA revised upward its estimate of real GDP growth in the first quarter of 2026 from an annual rate of 1.6 percent to an annual rate of 2.1 percent. Economists surveyed by LSEG had expected that the BEA would leave its estimate of real GDP growth in the first quarter unchanged. The following figure shows the BEA’s estimated rates of real GDP growth in each quarter beginning with the first quarter of 2022.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including former 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 at an annual rate of 1.7 percent in the first quarter, below the 2.1 percent rate of increase in real GDP and close to 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 of 2025, 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 the growth rate of real GDP.

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 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In May, headline PCE inflation was 4.1 percent, up from 3.8 percent in April, and the highest rate since April 2023. Core PCE inflation in May was 3.4 percent, up slightly from 3.3 percent in April. Headline PCE inflation was equal to the forecasts of economists surveyed by FactSet, while core PCE inflation was slightly higher. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows monthly PCE inflation and monthly core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation increased from 5.0 percent in April to 5.5 percent in May. Core PCE inflation rose from 3.0 in April to 3.9 percent in May. Even leaving aside the effect of rising gasoline prices on headline PCE, these data show that in May both core and headline PCE inflation were well above the Fed’s target.

Headline market-based PCE inflation was 3.9 percent in May, up from 3.7 percent in April. Core market-based PCE inflation was 3.2 percent in May, up slightly from 3.1 percent in April. So, both market-based measures, although lower than the full PCE measures, show inflation in May remaining well above the Fed’s 2 percent target.

New Fed Chair Kevin Warsh argued in testimony before the Senate that the Fed should stop relying on headline PCE inflation: “The measures [of inflation] I prefer are looking at things that are called trimmed averages. We take out all of the tail-risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy.”

The following figure shows headline PCE inflation the (blue line), core PCE inflation (the red line) and trimmed-mean PCE inflation (the brown line). Trimmed-mean PCE inflation in May was 2.4 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In May, median PCE inflation was 2.8 percent, also below both headline and core inflation. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data have had little effect on investors who buy and sell federal funds futures contracts. These investors still expect that the Federal Open Market Committee (FOMC) will leave its target for the federal funds rate unchanged at its meeting on July 28–29 but will raise the target by 0.25 percentage point at its September 15–16 meeting.

New BEA Releases Show Slower Growth and High Inflation

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The Bureau of Economic Analysis (BEA) released two reports this morning (May 28): “GDP (Second Estimate) and Corporate Profits, 1st Quarter 2026” and “Personal Income and Outlays, April 2026.” The BEA revised downward its estimate of real GDP growth in the first quarter of 2026 from an annual rate of 2.0 percent to an annual rate of 1.6 percent. Economists surveyed by the Wall Street Journal had expected that the BEA would leave its estimate of real GDP growth in the first quarter unchanged. The following figure shows the BEA’s estimated rates of GDP growth in each quarter beginning with the first quarter of 2022.

The following figure—taken from the BEA report—shows the contributions of each component of spending to the BEA’s downward revision of its estimate of GDP growth. The growth of both consumption spending and investment spending, which are the largest component of GDP, were revised downward. The downward revision in consumption spending reflects lower spending on services and the downward revision in investment spending reflects lower business spending on inventories.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including former 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 at an annual rate of 2.4 percent in the first quarter, which was well above the 1.6 percent rate of increase in real GDP and also 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 of 2025, 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 the growth rate of real GDP.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. 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 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In April, headline PCE inflation was 3.8 percent, up from 3.5 percent in March. Core PCE inflation in April was 3.3 percent, up slightly from 3.2 percent in March. Headline PCE inflation was slightly below and core PCE inflation was equal to the forecasts of economists surveyed by FactSet. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows monthly PCE inflation and monthly core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation fell from the very high rate of 8.9 percent in March to a still high rate of 4.9 percent in April. Core PCE inflation declined from 3.6 in March to 2.9 percent in April. Even leaving aside the effect of rising gasoline prices on headline PCE, these data show that in March both core and headline PCE inflation were well above the Fed’s target.

Headline market-based PCE inflation was 3.7 percent in April, up from 3.4 percent in March. Core market-based PCE inflation was 3.1 percent in April, unchanged from March. So, both market-based measures, although lower than the full PCE measures, show inflation in April remaining well above the Fed’s 2 percent target.

The following figure shows headline PCE inflation the (blue line), core PCE inflation (the brown line) and trimmed-mean PCE inflation (the red line). Trimmed-mean PCE inflation in April was 2.4 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In April, median PCE inflation was 2.8 percent, also below both headline and core inflation. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation running well above the Fed’s 2 percent annual inflation target.

Today’s macro data have had little effect on investors who buy and sell federal funds futures contracts. For some time, investors have seen little likelihood that the Fed’s policymaking Federal Open Market Committee would cut its target for the federal funds rate until sometime next year. These investors see it as far more likely that the committee will raise its target by the end of the year than that it will cut it.

CPI Inflation Worsens, As Expected

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Today (May 12), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for April. As expected, higher energy prices resulting from the conflict in Iran led to a jump in inflation. 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 3.8 percent in April, up from 3.3 in March. This was the highest inflation rate since May 2023.
The core inflation rate, which excludes the prices of food and energy, was 2.7 percent in April, up slightly from 2.6 percent in March.

Headline inflation and core inflation were both slightly higher than economists surveyed by the Wall Street Journal 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) was a very high 8.0 percent in April, which was actually down from 10.9 percent in March. Core inflation (the red line) was 4.6 percent in April, up from 2.4 percent in March.

The following figure emphasizes the role played 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. Inflation in energy prices declined from a very high 245.1 percent in March to a still high 56.6 percent in April. The red line shows the 1-month inflation rate in gasoline prices, which declined from an astounding 907.4 percent in March to a still very painful 88.8 percent in April.

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 grocery prices rose 8.5 percent in April after declining in March. Inflation in food prices away from home was 2.8 percent in April, down from 2.9 percent in March. The high rate of increase in grocery prices was due to rising energy prices, as well as to sharp increases in beef and fruit and vegetable prices, which rose for reasons largely unrelated to higher energy costs.

What effect is this inflation report likely to have on the Fed’s policymaking Federal Open Market Committee (FOMC) at its next meeting on June 16–17—Kevin Warsh’s first meeting as Fed chair? Earlier this year, some market analysts believed that replacing Jerome Powell as chair with Warsh would increase the probability of the FOMC cutting its target for the federal funds rate this year. But the acceleration in inflation during the past two months, even if it proves to be temporary, and relatively strong data on economic growth and employment make it unlikely that Warsh will push for a rate cut any time soon. At this point, trading by investors in the federal funds futures market favors the FOMC neither raising nor lowering its federal funds rate target during the remainder of this year.

Two Releases from the BEA this Morning Show Steady GDP Growth and Rising Inflation

Image created by ChatGPT of the Department of Commerce building in Washington, DC

The Bureau of Economic Analysis (BEA) released two reports this morning: “GDP (Advance Estimate), 1st Quarter 2026” and “Personal Income and Outlays, March 2026.” The BEA estimates that real GDP grew at annual rate of 2.0 percent in the first quarter of 2026. That rate was up sharply from 0.5 percent in the fourth quarter of 2025, but below the 2.2 percent rate economists surveyed by the Wall Street Journal had forecast. The following figure shows the BEA’s estimated rates of GDP growth in each quarter beginning with the first quarter of 2022.

As the following figure—taken from the BEA report—shows, investment spending made the largest contribution to the growth of real GDP in the first quarter, with consumption spending growing at a slower rate than during the previous three quarters. Spending on imports grew significantly more than did spending on exports, resulting in net exports reducing real GDP growth by 1.3 percentage points.

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 2.5 percent at an annual rate in the first quarter, which was well above the 2.0 percent increase in real GDP and also 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 of 2025, 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 BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. 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 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In March, headline PCE inflation was 3.4 percent, up from 2.7 percent in February. Core PCE inflation in March was 3.2 percent, up from 3.0 percent in February. Both headline PCE inflation and core PCE inflation remained well above the Fed’s 2 percent annual inflation target.

The following figure shows monthly PCE inflation and monthly core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation soared to 9.2 percent in March, up from to 4.9 percent in February. Core PCE inflation fell to 3.6 percent in March from 5.2 percent in February. Even leaving aside the effect of rising gasoline prices on headline PCE, these data show that in March both core and headline PCE inflation were far above the Fed’s 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 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 3.4 percent in March, up from 2.9 percent in February. Core market-based PCE inflation was 3.1 percent in March, up from 2.9 percent in February. So, both market-based measures show inflation in March remaining well above the Fed’s 2 percent target.

Increases in rent have been one driver of inflation. The following figure shows the 12-month change in service prices, excluding energy and housing prices. Inflation in service prices measured this way was 3.5 percent in March. One-month inflation (not shown) was even higher at 4.6 percent.

However measured, inflation is clearly running well above the Fed’s 2 percent target. Incoming Fed Chair Kevin Warsh is walking into a difficult situation. He’s likely to come under pressure from President Trump to convince his colleagues on the Federal Open Market Committee to cut the target for the federal funds rate. But it seems unlikely that a majority of the committee would be willing to cut the target with inflation remaining well above 2 percent. As we mentioned in yesterday’s post, investors who buy and sell federal funds futures contracts don’t expect that the target rate will be lowered before the committee’s meeting on December 14–15 2027.