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

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.

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 3.9 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.”

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 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

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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.

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.

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.

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 the figure below shows 1-month inflation.) Measured this way, headline PCE inflation declined to 3.4 percent in January, from to 4.4 percent in December. Core PCE inflation fell to 4.4 percent in January from 4.5 percent in December. Measured this way, both core and headline PCE inflation were well 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 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.)