12-month inflation v. 1-month inflation – Page 2 – HubbardOBrienEconomics.com Blog

CPI Inflation Comes in Slightly Below Expectations, Increasing Likelihood of Fed Rate Cuts

Fed Chair Jerome Powell (left) and Vice Chair Philip Jefferson (photo from federalreserve.gov)

Today (August 12), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for July. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.7 percent in July, unchanged from June.
The core inflation rate, which excludes the prices of food and energy, was 3.0 percent in July, up slightly from 2.9 percent in June. (Note that there was some inconsistency in how the core inflation rate is reported. The BLS, and some news outlets, give the value as 3.1 percent. The unrounded value is 3.0486 percent.)

Headline inflation and core inflation were slightly lower than what economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) declined from 3.5 percent in June to 2.4 percent in July. Core inflation (the red line) increased from 2.8 percent in June to 3.9 percent in July.

The 1-month and 12-month inflation rates are telling somewhat different stories, with 12-month inflation indicating that inflation is stable, although moderately above the Fed’s 2 percent inflation target. The 1-month core inflation rate indicates that inflation may have increased during July.

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.

A key reason for core inflation being significantly higher than headline inflation is that gasoline prices declined by 23.1 percent at an annual rate in June. As shown in the following figure, 1-month inflation in gasoline prices moves erratically—which is the main reason that gasoline prices aren’t included in core inflation.

Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that many of the tariff increases announced on April 2 have since been reduced) The following figure shows 12-month inflation in three categories of products whose prices are thought to be particularly vulnerable to the effects of tariffs: apparel (the blue line), toys (the red line), and motor vehicles (the green line). To make recent changes clearer, we look only at the months since January 2021. In July, prices of apparel fell, while the prices of toys and motor vehicles rose by less than 1.0 percent.

The following figure shows 1-month inflation in these prices of these products. In July, motor vehicles prices and apparel prices increased by less than 1 percent, while toy prices increased by 1.9 percent after having soared soared by 24.3 percent in June. At least for these three products, it’s difficult to see tariffs as having had a significant effect on inflation in July.

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

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

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

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation declined from 3.9 percent in June to 2.9 percent in July. One-month median inflation also declined from 4.1 percent in June to 3.7 percent in July. These data indicate that inflation may have slowed in July (the opposite conclusion we noted earlier when discussing 1-month core inflation), while remaining above the Fed’s 2 percent target.

What are the implications of this CPI report for the actions the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next meetings? Even before today’s relatively favorable, if mixed, inflation report, the unexpectedly weak jobs report at the beginning of the month (which we discuss in this blog post) made it likely that the FOMC would soon begin cutting its target for the federal funds rate.

Investors who buy and sell federal funds futures contracts assign a probability of 94.3 percent to FOMC cutting its target for the federal funds rate at its September 16–17 meeting by 0.25 (25 basis points) from its current target range of 4.25 percent to 4.50 percent. That probability increased from 85.9 percent yesterday. (We discuss the futures market for federal funds in this blog post.) Investors assign a probability of 61.5 percent to the FOMC cutting its target again by 25 basis points at its October 28–29 meeting, and a probability of 50.3 percent to a third 25 basis point cut at the committee’s December 9–10 meeting.

PCE Inflation Comes in Higher Than Expected

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Yesterday, in this blog post, we discussed the quarterly data on inflation as measured by changes in the personal consumption expenditures (PCE) price index. Today (July 31), the Bureau of Economic Analysis (BEA) released monthly data on the PCE price index as part of its “Personal Income and Outlays” report. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2017, with inflation measured as the percentage change in the PCE from the same month in the previous year. In June, headline PCE inflation was 2.6 percent, up from 2.4 percent in May. Core PCE inflation in June was 2.8 percent, unchanged from May. Headline PCE inflation was higher than the forecast of economists surveyed, while core PCE inflation was the same as forecast.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, headline PCE inflation jumped from 2.0 percent in May to 3.4 percent in June. Core PCE inflation increased from 2.6 percent in May to 3.1 percent in June. So, both 1-month PCE inflation estimates are well above the Fed’s 2 percent target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. In addition, these data likely don’t capture fully the higher prices likely to result from the tariff increases the Trump administration has implemented, including those in trade agreements that have only been announced in the past few days.

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

Headline market-based PCE inflation was 2.3 percent in June, up from 2.1 percent in May. Core market-based PCE inflation was 2.6 percent in June, up from 2.4 percent in May. So, both market-based measures show similar rates of inflation in June as the total measures do. In the following figure, we look at 1-month inflation using these measures. The 1-month inflation rates are both higher than the 12-month rates. One-month headline market-based inflation soared to 3.9 percent in June from 1.6 percent in May. One-month core market-based inflation also increased sharply to 3.6 percent in June from 2.2 percent in May. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate. Still, looking at 1-month inflation gives us a better look at current trends in inflation, which these data indicate is rising significantly.

Is the increase in inflation attributable to the effects of tariffs? At this point, it’s too early to tell, particularly since, as noted earlier, all tariff increases have not yet been implemented. We can note, though, that the effect of tariffs are typically seen in goods prices, rather than in service prices because tariffs are levied primarily on imports of goods. As the following figure shows, one-month inflation in goods prices jumped from 0.9 percent in May to 4.8 percent in June, while one-month inflation in services prices increased only from 2.5 percent in May to 2.8 percent in June.

Finally, we noted in a blog post yesterday that investors trading federal funds rate futures assigned a 55.0 percent probability to the Federal Open Market Committee leaving its target for the federal funds rate unchanged at its meeting on September 16–17. With today’s PCE report showing higher than expected inflation, that probability has increased to 60.8 percent.

Effect of Tariffs May Have Pushed Up CPI Inflation in June

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Today (July 15), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for 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 2.7 percent in June—up from 2.4 percent in May.
The core inflation rate, which excludes the prices of food and energy, was 2.9 percent in June—up slightly from 2.8 percent in May.

Headline inflation was slightly higher and core inflation was slightly lower than what economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) surged from 1.0 percent in May to 3.5 percent in June. Core inflation (the red line) also increased sharply from 1.6 percent in May to 2.8 percent in June.

The 1-month and 12-month inflation rates are telling different stories, with 12-month inflation indicating that the rate of price increase is running moderately above the Fed’s 2 percent inflation target. The 1-month inflation rate indicates more clearly that inflation increased significantly during June.

Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that some of the tariff increases announced on April 2 have since been reduced) The following figure shows 12-month inflation in three categories of products whose prices are thought to be particularly vulnerable to the effects of tariffs: apparel (the blue line), toys (the red line), and motor vehicles (the green line). To make recent changes clearer, we look only at the months since January 2021. In June, prices of apparel fell, while the prices of toys and motor vehicles rose by less than 1.0 percent.

The following figure shows 1-month inflation in these prices of these products. In June, the motor vehicles prices fell, while apparel prices increased 5.3 percent and the prices of toys soared by 24.3 percent, which was the second month in a row of very large increases in toy prices.

The 1-month inflation data for these three products are a mixed bag with two of the products showing significant increases and one showing a decline. It’s likely that some of the effects of the tariffs are still being cushioned by firms increasing their inventories earlier in the year in anticipation of price increases resulting from the tariffs. As firms draw down their inventories, we may see tariff-related increases in the prices of more goods later in the year.

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

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

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.2 percent in June, up from 3.0 percent in May. Twelve-month median inflation (the red line) 3.6 percent in June, up from 3.5 percent in May.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation rose sharply from 2.2 percent in May to 3.9 percent in June. One-month median inflation also rose sharply from 2.7 percent in May to 4.1 percent in June. These data provide some confirmation that inflation likely rose from May to June.

What are the implications of this CPI report for the actions the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next meetings? Investors who buy and sell federal funds futures contracts still expect that the FOMC will leave its target for the federal funds rate unchanged at its July 29–30 meeting before cutting its target by 0.25 (25 basis points) from its current target range of 4.25 percent to 4.50 percent at its September 16–17 meeting. (We discuss the futures market for federal funds in this blog post.) The FOMC’s actions will likely depend in part on the effect of the tariff increases on the inflation rate during the coming months. If inflation were to increase significantly, it’s possible that the committee would decide to raise, rather than lower, its target range.

Mixed PCE Inflation Report and Slowing Growth Provides Murky Outlook for the Fed

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Today (June 27), the BEA released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2016, with inflation measured as the percentage change in the PCE from the same month in the previous year. In May, headline PCE inflation was 2.3 percent, up from 2.2 percent in April. Core PCE inflation in May was 2.7 percent, up from 2.6 percent in April. Headline PCE inflation was equal to the forecast of economists surveyed, while core PCE inflation was slightly higher than forecast.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation increased in from 1.4 percent in April to 1.6 percent in May. Core PCE inflation also increased from 1.6 percent in April to 2.2 percent in May. So, both 1-month PCE inflation estimates are close to the Fed’s 2 percent target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. In addition, these data likely don’t capture fully the higher prices likely to result from the tariff increases the Trump administration announced on April 2.

Headline market-based PCE inflation was 2.1 percent in May, up from 1.9 percent in April. Core market-based PCE inflation was 2.4 percent in May, up from 2.3 percent in April. So, both market-based measures show similar rates of inflation in May as the total measures do. In the following figure, we look at 1-month inflation using these measures. The 1-month inflation rates are both lower than the 12-month rates. One-month headline market-based inflation was 1.5 percent in May, down from 2.3 percent in April. One-month core market-based inflation was 2.1 percent in May, down from 2.7 percent in April. 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.

Earlier this week, the BEA released a revised estimate of real GDP growth during the first quarter of 2025—January through March. The BEA’s advance estimate, released on April 30, was that real GDP fell by 0.3 percent in the first quarter, measured at an annual rate. (We discussed the BEA’s advance estimate in this blog post.) The BEA’s revised estimate is that real GDP fell by 0.5 percent in the first quarter. The following figure shows the current estimated rates of real GDP growth in each quarter beginning in 2021.

As we noted in our post discussing the advance estimate, one way to strip out the effects of imports, inventory investment, and government purchases—which can all be volatile—is to look at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. According to the advance estimate, real final sales to private domestic purchasers increased by 3.0 percent in the first quarter of 2025. According to the revised estimate, real final sales to private domestic purchasers increased by only 1.9 percent in the first quarter, down from 2.9 percent growth in the fourth quarter of 2024. These revised data indicate that economic growth likely slowed in the first quarter.

In summary, this week’s data provide some evidence that the inflation rate is getting close to the Fed’s 2 percent annual target and that economic growth may be slowing. Do these data make it more likely that the Fed’s policymaking Federal Open Market Committee (FOMC) will cut its target for the federal funds rate relatively soon?

Investors who buy and sell federal funds futures contracts still expect that the FOMC will leave its federal funds rate target unchanged at its next meetings on July 29–30 and September 16–17. Investors expect that the committee will cut its target at its October 28–29 meeting. (We discuss the futures market for federal funds in this blog post.) There remains a possibility, though, that future macroeconomic data releases, such as the June employment data to be released on July 3, may lead the FOMC to cut its target rate sooner.

Not Much Sign of the Effects of Tariffs in the May CPI Inflation Report

Image generated by ChatGTP-4o of someone shopping for clothes.

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

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.4 percent in May—up slightly from 2.3 percent in April.
The core inflation rate, which excludes the prices of food and energy, was 2.9 percent in May—up slightly from 2.8 percent in April.

Headline inflation was slightly lower and core inflation was the same as what economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) decreased from 2.7 percent in April to 1.0 percent in May. Core inflation (the red line) decreased from 2.9 percent in April to 1.6 percent in May.

The 1-month and 12-month inflation rates are telling different stories, with 12-month inflation indicating that the rate of price increase is running slightly above the Fed’s 2 percent inflation target. The 1-month inflation rate indicates a significant slowing of inflation during May.

One of the key questions facing Federal Reserve policymakers is to what extent inflation will be affected by the increase in tariffs that the Trump administration announced on April 2. The following figure shows 12-month inflation in three categories of products whose prices are thought to be particularly vulnerable to the effects of tariffs: apparel (the blue line), toys (the red line), and motor vehicles (the green line). In May, prices of apparel fell, while the prices of toys and motor vehicles rose by less than 0.5 percent.

The following figure shows 1-month inflation in these categories. In May, the prices of apparel and motor vehicles fell, while the price of toys soared by 17.4 percent, but that followed a decline of 10.3 percent in April.

Taken together this month’s CPI data don’t show much effect of tariffs on inflation. It’s possible that some of the effects of the tariffs have been cushioned by firms increasing their inventories earlier in the year in anticipation of price increases resulting from the tariffs. If so, as firms draw down their inventories, we may see tariff-related increases in the prices of some goods later in the year.

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

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

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.0 percent in May, unchanged from April. Twelve-month median inflation (the red line) 3.5 percent in May, also unchanged from April.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation decreased from 3.0 percent in April to 2.2. percent in May. One-month median inflation declined from 4.0 percent in April to 2.7 percent in May. These data provide some confirmation that inflation likely fell somewhat from April to May.

What are the implications of this CPI report for the actions the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next several meetings? Investors who buy and sell federal funds futures contracts still do not expect that the FOMC will cut its target for the federal funds rate at its next two meetings. (We discuss the futures market for federal funds in this blog post.) Investors assign the highest probability to the FOMC making two 0.25 percentage point (25 basis points) cuts in its target rate by the end of the year. Those cuts would reduce the target range from the current 4.25 percent to 4.50 percent range to a range of 3.75 to 4.00 percent. The FOMC’s actions will likely depend in part on what the tariff increases will end up being following the conclusion of the current trade negotiations and what the effect on inflation from the tariff increases will be.

PCE Inflation Slowed More than Expected in April

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Today (May 30), the BEA released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2016, with inflation measured as the percentage change in the PCE from the same month in the previous year. In April, PCE inflation was 2.1 percent, down from 2.3 percent in March. Core PCE inflation in April was 2.5 percent, down from 2.7 percent in March. Headline PCE inflation was below the forecast of economists surveyed, while core PCE inflation was consistent with the forecast.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation increased in April to 1.2 percent from 0.1 percent in March. Core PCE inflation also increased from 1.1 percent in March to 1.4 percent in April. So, both 1-month PCE inflation estimates are well below the Fed’s 2 percent target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. In addition, because these data are for April, they don’t capture fully the price increases resulting from the tariff increases the Trump administration announced on April 2.

Fed Chair Jerome Powell has noted that inflation in non-market services has been high. 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 1.9 percent in April, unchanged from March. Core market-based PCE inflation was 2.3 percent in April, which was also unchanged from March. So, both market-based measures show about the same rate of inflation in April as the total measures do. In the following figure, we look at 1-month inflation using these measures. The 1-month inflation rates are both higher than the 12-month rates. Headline market-based inflation was 2.6 percent in April, up from 0.1 percent in March. Core market-based inflation was 3.1 percent in April, up from 1.2 percent in March. 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.

In summary, today’s data provide some evidence that the inflation rate is getting closer to the Fed’s 2 percent annual target. Improving inflation combined with some indications that output growth is slowing—the BEA release indicated that growth in real consumption expenditures slowed in April—might make it more likely that the Fed’s policymaking Federal Open Market Committee (FOMC) will cut its target for the federal funds rate relatively soon.

However, investors who buy and sell federal funds futures contracts expect that the FOMC will leave its federal funds rate target unchanged at its next meetings on June 17–18 and July 29–30. (We discuss the futures market for federal funds in this blog post.) Investors assign a probability 0f 72.6 percent to the FOMC cutting its target at its September 29–30 meeting. Investor expectations reflect the recent statements from Fed Chair Jerome Powell and other members of the FOMC that they intend to wait until the effects of the tariff increases on the economy are clearer before changing the target for the federal funds rate.

Annual CPI Inflation Is the Lowest in Four Years

Image generated by ChatGTP-4o of a family shopping in a supermarket.

Today (May 13), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for April. The following figure compares headline inflation (the blue line) and core inflation (the green line).

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.3 percent in April—down from 2.4 percent in March.
The core inflation rate, which excludes the prices of food and energy, was 2.8 percent in April—unchanged from March.

Headline inflation was the lowest since February in 2021—before the acceleration in inflation that began in the spring of 2021. Core inflation was the lowest since March 2021. Both headline inflation and core inflation were what economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) rose from –0.6 percent in March to 2.7 percent in April. Core inflation (the red line) rose from 0.9 percent in March to 2.9 percent in April.

The 1-month and 12-month inflation rates are telling different stories, with 12-month inflation indicating that the rate of price increase is back to what it was in early 2021. The 1-month inflation rate indicates a significant increase in April from the very low rate of price increase in March. The 1-month inflation rate indicates that inflation is still running ahead of the Fed’s 2 percent annual inflation target.

Of course, it’s important not to overinterpret the data from a single month. The figure shows that 1-month inflation is particularly volatile. It is possible, though, that the increase in 1-month inflation in April reflects the effect on the price level of the large tariff increases the Trump Administration announced on April 2. Whether those effects will persist is unclear because the administration has been engaged in negotiations that may significantly reduce the tariff increases announced in April. Finally, 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.

There’s been considerable discussion in the media about continuing inflation in grocery prices. The following figure shows inflation in the CPI category “food at home,” which is primarily grocery prices. Inflation in grocery prices was 2.0 percent in April and has been below 2.5 percent every month since September 2023. Over the past year, there has been a slight upward trend in inflation in grocery prices but to this point it remains relatively low, although well above the very low rates of inflation in grocery prices that prevailed from 2015 to 2019.

It’s the nature of the CPI that in any given month some prices will increase rapidly while other prices will increase slowly or even decline. Although, on average, grocery price inflation has been relatively low, there have been substantial increases in the prices of some food items. For instance, a recent article in the Wall Street Journal noted that rising cattle prices will likely be reflected in coming months rising prices for beef purchased in supermarkets. The following figure shows inflation in the prices of ground beef and steaks over the period starting in January 2015. As we should expect, the prices of these two goods are more volatile mont to month than are grocery prices as a whole. Ground beef prices increased 10.8 percent in April, an increase that will likely be noticeable to someone planning for a Memorial Day cookout.

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

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

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.0 percent in April, unchanged from March. Twelve-month median inflation (the red line) 3.5 percent in April, also unchanged from March.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation increased from 2.6 percent in March to 3.0. percent in April. One-month median inflation declined from 4.2 percent in March to 4.0 percent in April. These data, although mixed, provide some confirmation that inflation likely increased somewhat from March to April.

What are the implications of this CPI report for the actions the FOMC may take at its next several meetings? Investors who buy and sell federal funds futures contracts still do not expect that the FOMC will cut its target for the federal funds rate at its next two meetings. (We discuss the futures market for federal funds in this blog post.) Today, investors assigned only an 8.4 percent probability to the Fed’s policymaking Federal Open Market Committee (FOMC) cutting its target from the current 4.25 percent to 4.50 percent range at its meeting on June 17–18. Investors assigned a probability of 34.9 percent that the FOMC will cut its target after its meeting on July 29–30. Investors assigned a probability of 73.1 percent that the committee will cut its target after its meeting on September 16–17. The FOMC’s actions will likely depend in part on the success of the current trade negotiations.

CPI Inflation Slows More than Expected

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Today (April 10), the Bureau of Labor Statistics (BLS) released its monthly report on the consumer price index (CPI). The following figure compares headline inflation (the blue line) and core inflation (the red line).

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.4 percent in March—down from 2.8 percent in February.
The core inflation rate, which excludes the prices of food and energy, was 2.8 percent in March—down from 3.1 percent in February.

Both headline inflation and core inflation were below what economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) fell sharply from 2.6 percent in March to –0.6 percent—that is, the economy experienced deflation in March. Core inflation (the red line) decreased from 2.6 percent in February to 0.7 percent in March.

Overall, considering 1-month and 12-month inflation together, inflation slowed significantly in March. Of course, it’s important not to overinterpret the data from a single month. The figure shows that 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.

There’s been considerable discussion in the media about continuing inflation in grocery prices. In the following figure the blue line shows inflation in the CPI category “food at home,” which is primarily grocery prices. Inflation in grocery prices was 2.4 percent in March, up from 1.8 percent in February, but still far below the peak of 13.6 percen in August 2022. Although, on average, grocery price inflation has been low over the past 18 months, there have been substantial increases in the prices of some food items. For instance, egg prices—shown by the red line—increased by 108.1 percent in March. But, as the figure shows, egg prices are usually quite volatile month-to-month, even when the country is not dealing with an epidemic of bird flu.

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

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

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.0 percent in March, down from 3.1 percent in February. Twelve-month median inflation (the red line) also declined slightly from 3.1 percent in February to 3.0 percent in March.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation fell from 3.3 percent in February to 2.6. percent in March. One-month median inflation increased from 3.5 percent in February to 4.1 percent in March. These data are noticeably higher than either the 12-month measures for these variables or the 1-month and 12-month measures of headline and core inflation. Again, though, all 1-month inflation measures can be volatile.

There isn’t much sign in today’s CPI report that the tariffs recently imposed by the Trump Administration have affected retail prices. President Trump announced yesterday that many of the tariffs would be suspended for at least 90 days, although the across-the-board tariff of 10 percent remains in place and a tariff of 145 percent has been imposed on goods imported from China. It would surprising if those tariff increases don’t begin to have at least some effect on the CPI over the next few months. As we noted in this post from earlier in the month, Tariffs pose a dilemma for the Fed, because tariffs have the effect of both increasing the price level and reducing real GDP and employment.

What are the implications of this CPI report for the actions the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next two meetings? Investors who buy and sell federal funds futures contracts still do not expect that the FOMC will cut its target for the federal funds rate at its next two meetings. (We discuss the futures market for federal funds in this blog post.) Today, investors assigned only a 29.9 percent probability that the Fed’s policymaking Federal Open Market Committee (FOMC) will cut its target from the current 4.25 percent to 4.50 percent range at its meeting on May 6–7. Investors assigned a probability of 85.2 percent that the FOMC would cut its target after its meeting on June 17–18 by at least 0.25 percent (or 25 basis points).

By the time the FOMC meets again in early May we may have more data on the effects the tariffs are having on the economy.

Not Much Good News in Today’s PCE Inflation Data

Image generated by GTP-4o

Today (March 28), the BEA released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2016 with inflation measured as the percentage change in the PCE from the same month in the previous year. In February, PCE inflation was 2.5 percent, unchanged since January. Core PCE inflation in January was 2.8 percent, up slightly from 2.7 percent in January. Headline PCE inflation was consistent with the forecasts of economists, but core PCE inflation was higher.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation declined slightly in February to 4.0 percent from 4.1 percent in January. Core PCE inflation jumped in February to 4.5 percent from 3.6 percent in January. So, both 1-month PCE inflation estimates are running well above the Fed’s 2 percent target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. But it is definitely concerning that 1-month inflation has risen each month since November 2024.

Fed Chair Jerome Powell has noted that inflation in non-market services has been high. 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 green line) for market-based PCE. (The BEA explains the market-based PCE measure here.)

Headline market-based PCE inflation was 2.2 percent in February, and core market-based PCE inflation was 2.4 percent. So, both market-based measures show less inflation in February than do the total measures. In the following figure, we look at 1-month inflation using these measures. The 1-month inflation rates are both very high. Headline market-based inflation was 4.0 percent in February, up from 3.5 percent in January. Core market-based inflation was 4.6 percent in February, up from 2.8 percent in January. Both 1-month market-based inflation members have increased each month since November.

In summary, today’s data don’t show any evidence that inflation is returning to the Fed’s 2 percent annual target. It has to concern the Fed that the 1-month inflation measures have been increasing since November with the latest data showing inflation running far above the Fed’s target. The Fed’s goal of a “soft landing”—with inflation returning to the Fed’s 2 percent target without the economy entering a recession—no longer appears to be on the horizon. The current data seem more consistent with a “no landing” scenario in which the economy avoids a recession but inflation doesn’t return to the Fed’s target. As a result, it seems very unlikely that the Fed’s policymaking Federal Open Market Committee (FOMC) will lower its target for the federal funds rate at its next meeting on May 6-7, unless the unemployment rate jumps or the growth of output slows dramatically.

Investors who buy and sell federal funds futures contracts expect that the FOMC will leave its federal funds rate target unchanged at its next meeting. (We discuss the futures market for federal funds in this blog post.) As the following figure shows, investors assign a probability of 82.9 percent to the FOMC leaving its target for the federal funds rate unchanged at the current range of 4.25 percent to 4.50 percent. Investors assign a probability of only 17.1 percent to the FOMC cutting its target by 0.25 percentage point (25 basis points).

As the following figure shows, investors assign a probability of 72.9 percent percent to the FOMC cutting its target range by at least 25 basis points at its meeting on June 17–18. Despite the bad news on inflation in today’s BEA report, investors assign a zero probability to the FOMC increasing its target range for the federal funds rate to help push inflation back to the Fed’s target. One aspect of the current situation that both policymakers and investors are uncertain of is the effect of the Trump Administration’s new tariffs on the price level. It’s possible that some of the increase in inflation seen in today’s report is the result of tariff increases, but the full extent of the effect will only become evident when the tariffs are fully in place.

CPI Inflation Is Lower than Expected, but Still above Target

Photo courtesy of Lena Buonanno.

Today (March 12), the Bureau of Labor Statistics (BLS) released its monthly report on the consumer price index (CPI). The following figure compares headline inflation (the blue line) and core inflation (the green line).

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.8 percent in February—down from 3.0 percent in January.
The core inflation rate, which excludes the prices of food and energy, was 3.1 percent in February—down from 3.3 percent in January.

Both headline inflation and core inflation were slightly below what economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) fell sharply from 5.7 percent in February to 2.6 percent in January. Core inflation (the green line) decreased from 5.5 percent in January to 2.8 percent in January.

Overall, considering 1-month and 12-month inflation together, the most favorable news is the sharp decline in both the headline and the core 1-month inflation rats. But inflation is still running ahead of the Fed’s 2 percent annual inflation target.

Of course, it’s important not to overinterpret the data from a single month. The figure shows that 1-month inflation 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.

There’s been considerable discussion in the media about continuing inflation in grocery prices. In the following figure the blue line shows inflation in the CPI category “food at home,” which is primarily grocery prices. Inflation in grocery prices was 1.8 percent in February and has been below 2 percent every month since November 2023. Although on average grocery price inflation has been low, there have been substantial increases in the prices of some food items. For instance, egg prices—shown by the green line—increased by 96.8 percent in February. But, as the figure shows, egg prices are usually quite volatile month-to-month, even when the country is not dealing with an epidemic of bird flu.

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

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

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.1 percent in February, unchanged from January. Twelve-month median inflation (the green line) declined slightly from 3.6 percent in January to 3.5 percent in February.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation fell from 5.1 percent in January to 3.3. percent in February. One-month median inflation from 3.9 percent in January to 3.5 percent in February. These data provide confirmation that (1) CPI inflation at this point is likely running higher than a rate that would be consistent with the Fed achieving its inflation target, and (2) inflation slowed somewhat from January to February.

What are the implications of this CPI report for the actions the FOMC may take at its next several meetings? The major stock market indexes rose sharply at the beginning of trading this morning, but then swung back and forth between losses and gains. Inflation being lower than expected may have increased the probability that the FOMC will cut its target for the federal funds rate sooner rather than later. Lower inflation and lower interest rates would be good news for stock prices. But investors still appear to be worried about the extent to which a trade war might both slow economic growth and increase the price level.

Investors who buy and sell federal funds futures contracts still do not expect that the FOMC will cut its target for the federal funds rate at its next two meetings. (We discuss the futures market for federal funds in this blog post.) Today, investors assigned only a 1 percent probability that the Fed’s policymaking Federal Open Market Committee (FOMC) will cut its target from the current 4.25 percent to 4.50 percent range at its meeting next week. Investors assigned a probability of 33.3 percent that the FOMC would cut its target after its meeting on May 6–7. Investors today assigned a probability of 78.6 percent that the committee will cut its target after its meeting on June 17–18. That probability has fallen slightly over the past week.

At his press conference after next Wednesday’s FOMC meeting, Fed Chair Jerome Powell will give his thoughts on the current economic situation.