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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.

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.

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.

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 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.

Healthcare Jobs Dominate Employment Growth in the United States

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It’s not surprising that employment in health care has been increasing. The National Health Expenditure (NHE) Projections Model of the Centers for Medicare & Medicaid Services estimates that the long-run income elasticity of demand for private personal health care spending is 1.58. So, a 10 percent increase in U.S. disposable personal income will result in the long run in a 15.8 percent increase in private personal health care spending. In other words, we would expect personal health care spending to become an increasing fraction of total household spending. In addition, the median age of the U.S. population has increased from 32.9 years in 1990 to a projected 40.1 years in 2025. As people age, their demand for health care increases. Finally, holding income and age constant, demand for health care has also increased as a result of the increasing effectiveness of medical care in treating disease.

Despite these long-run trends, it’s surprising how dependent increases in U.S. employment have become recently on the growth in health care jobs. The following figure shows monthly changes in a broad measure of health care employment (the blue bars) and in total nonfarm employment (the red bars), using data from the establishment survey from the Bureau of Labor Statistics (BLS). (This blog post yesterday discussed the latest “Employment Situation” report from the BLS.)

The values for January 2023 through December 2024 show what we might expect—the increase in total employment being significantly larger than the increase in health care employment. During this period, health care employment was about 48.5 percent of total employment. In other words, although health care employment was a key driver of increases in employment, non-health care employment was also steadily increasing. The situation since January 2025 is much different with health care employment increasing by 817,000, while total employment increased by only 311,000. In other words, since January 2025, employment outside of health care (again, broadly defined) has fallen by more than 500,000 jobs.

We can look at longer term trends in health care employment relative to employment in other industries. The following maps show the change over time in the industry with the most employment in each state, using data from the BLS’s “Quarterly Census of Employment and Wages.” The industries are grouped into four broad categories: manufacturing, retail trade, leisure and hospitality, and health care. (Industries are defined as follows using the North American Industry Classification System (NAICS): Manufacturing is NAICS 31–33, Retail trade is NAICS 44–45, Leisure and hospitality is NAICS 72, and health care is NAICS 62.)

In 1990, manufacturing was the largest source of private employment in most states, and in no state was health care the largest employer. By 2000, manufacturing was still the largest employer in 27 states, but health care had become the largest employer in 2 states. The results for 2024 are strikingly different: Manufacturing was no longer the largest employer in any state, and health care was the largest employer in 48 states—every state except for Hawaii and Nevada.

In 1990, almost twice as many people in the United States worked in manufacturing as worked in health care. In 2024, employment in health care was 80 percent greater than employment in manufacturing. And these trends are likely to continue. The BLS forecast in 2025 that 12 of the 20 fastest-growing occupations over the next 10 years will be in health care.

Surprisingly Strong Jobs Report Accompanied by a Large Downward Annual Benchmark Revision

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This morning (February 11), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for January. The report was originally scheduled to be released last Friday but was postponed by the brief federal government shutdown. The data in the report show that the labor market was much stronger than expected in January.

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 130,000 nonfarm jobs during January. This increase was well above the increase of 55,000 that economists surveyed by the Wall Street Journal had forecast. Economists surveyed by Bloomberg had a higher forecast of 65,000 net jobs. The BLS revised downward its previous estimates of employment in November and December by a combined 17,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The increase in net jobs in January was the largest since December 2024.

The unemployment rate, which is calculated from data in the household survey, fell from 4.4 percent in December to 4.3 percent in January. As the following figure shows, the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since May 2024. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is slightly above the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 528,000 in January, far above the increase in jobs from the payroll survey. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.) In any particular month, the story told by the two surveys can be inconsistent. In this case, both surveys indicate unexpectedly strong job growth, with the increase in household employment being particularly strong. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In January the ratio was 80.9 percent, the highest since September 2024. In addition to matching the recent highs reached in mid-2024, the prime-age employment-population ratio is above what the ratio was in any month since April 2001. The continued high levels of the prime-age employment-population ratio indicates some continuing strength in the labor market.

The Trump Administration’s layoffs of some federal government workers are clearly shown in the estimate of total federal employment for October, when many federal government employees exhausted their severance pay. (The BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.”) As the following figure shows, there was a decline federal government employment of 166,000 in October, with additional declines in the following three months. The total decline in federal government employment since the beginning of February 2025 is 324,000.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.7 percent in January, the same as in December.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. In January, the 1-month rate of wage inflation was 5.0 percent, up from 0.7 percent in December. This increase in wage growth may be an indication of a strengthening labor market. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

In today’s jobs report, the BLS also included its final annual benchmark revision to the establishment employment data. (We discussed the preliminary annual revision in this blog post last September.) The following table from the jobs report indicates that the revision was quite substantial. The revised estimate of payroll employment is 1,029,000 jobs lower than the original estimate. The increase in total nonfarm employment in 2025 was revised down to only 181,000 from the original estimate of 584,000. Leaving aside the collapse in employment in 2020 during the Covid pandemic, job growth in 2025 was the slowest since 2010 in the immediate aftermath of the Great Recession of 2007–2009.

Despite the large downward revision to job growth in 2025, the strong job growth for January in today’s jobs report makes it unlikely that the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) will 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 jumped from 79.9 percent yesterday to 92.1 percent after the release of today’s jobs report.

December JOLTS Report Shows Possible Labor Market Weakening

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Today (February 5), the Bureau of Labor Statistics (BLS) released its “Job Openings and Labor Turnover” (JOLTS) report for December 2025. The report indicated that labor market conditions may be weakening. The following figure shows that the rate of job openings fell to 3.9 percent in December from 4.2 percent in November. The rate was 4.5 percent in October. The job openings rate is the lowest since April 2020, at the start of the Covid pandemic. We should note the usual caveat that the monthly JOLTS data is subject to potentially large revisions as the BLS receives more complete data.

(The BLS defines a job opening as a full-time or part-time job that a firm is advertising and that will start within 30 days. The rate of job openings is the number of job openings divided by the number of job openings plus the number employed workers, multiplied by 100.)

In the following figure, we show a measure of the state of the labor market that economists frequently use: the total number of job openings to the total number of people unemployed. In December there were 0.87 job openings per unemployed person, the lowest value for that measure since March 2021, during the recovery from the pandemic. The value was 1.0 in September. (Note that data for October and November are unavailable because the data weren’t collected during the shutdown of the federal government from October 1 to November 12 last year.) The value for December is well below the 1.21 job openings per employed person in February 2020, just before the pandemic. (Note that, as we discussed in this blog post, the employment-population ratio for prime age workers, which many economists consider a key measure of the state of the labor market, rose in December, putting it above what the ratio was in any month during the period from January 2008 to February 2020.)

The rate at which workers are willing to quit their jobs is an indication of how they perceive the ease of finding a new job. As the following figure shows, the quit rate declined slowly from a peak of 3 percent in late 2021 and early 2022 to 2.0 percent in August 2024, the same value as in December 2025. That rate is below the rate during 2019 and early 2020. By this measure, workers’ perceptions of the state of the labor market have remained remarkably stable over the last year and a half.

Overall, this JOLTS report is consistent with what some economists have labeled a “slow hire, slow fire” labor market. Fed Chair Jerome Powell’s remarks at his press conference following the last meeting of the Federal Open Market Committee (FOMC) indicates that Fed policymakers share this view, which Powell believes complicates monetary policymaking:

“So there are lots of … little places that suggest that the labor market has softened, but part of … payroll job softening is that both the supply and demand for labor has come down … growth in those two have come down. So that makes it a difficult time to read the labor market. So, imagine they both came down a lot, to the point where there is no job growth. Is that full employment? In a sense it is. If demand and supply are … in balance, you could say that’s full employment. At the same time, is it—do we really feel like … that’s a maximum employment economy? It’s a challenging—it’s very challenging and quite unusual situation.”

The BLS was scheduled to release its monthly “Employment Situation” report (often called the “jobs report”) for January 2026 tomorrow. Because of the temporary lapse in funding that began Saturday, the report will instead be released next Wednesday, February 11. That report will provide additional data on the state of the labor market. (Note that the data in the JOLTS report lag the data in the “Employment Situation” report by one month.)

As Expected, the FOMC Keeps the Federal Funds Rate Target Unchanged

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Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) had the expected result with the committee deciding to keep its target range for the federal funds rate unchanged at 3.50 percent to 3.75 percent. Fed Governors Stephen Miran and Christopher Waller voted against the action, preferring to lower the target range for the federal funds rate by 0.25 percentage point or 25 basis points.

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

Powell’s press conference following the meeting was his first opportunity to discuss the Department of Justice having served the Federal Reserve with grand jury subpoenas, which indicted that Powell might face a criminal indictment related to his testimony before the Senate Banking Committee in June concerning expenditures on renovating Federal Reserve buildings in Washington DC. It was also his first opportunity to discuss his attendance at the Supreme Court during oral arguments in the case that Fed Governor Lisa Cook brought attempting to block President Trump’s attempt to remove her from the Fed’s Board of Governors.

Powell stated that he had attended the Supreme Court hearing because he believed the case to be the most important in the Fed’s history. He noted that there was a precedent for his attendance in that Fed Chair Paul Volcker had attended a Supreme Court during his term. Powell declined to say anything further with respect to the Department of Justice subpoenas or with respect to whether he would stay on the Board of Governors after his term as chair ends in May. (Powell’s term as chair ends on May 15; his term as a Fed governor ends on January 31, 2028.)

With respect to the economy, Powell stated that he saw the risks to the two parts of the Fed’s dual mandate for price stability and maximum employment to be roughly balanced. Although inflation continues to be above the Fed’s annual target of 2 percent, committee members believe that inflation is elevated because of one-time price increases resulting from tariffs. The committee’s staff economists believe that most of the effects of tariffs on the price level were likely to have passed through the economy sometime in the middle of the year.

Powell noted that the economy had surprised the committee with its strength and that the outlook for further growth in output was good. He noted that there continued to be signs of slight weakening of the labor market. In particular, he cited increases in the broadest measure of the unemployment rate released by the Bureau of Labor Statistics (BLS).

The following figure shows the U-6 measure of the unemployment rate (the blue bars). This measure differs from the more familiar (U-3) measure of the unemployment rate (the red bars) in that it includes people who are working part time for economic reasons and people who are marginally attached to the labor force. The BLS counts people as marginally attached to the labor force if they “indicate that they have searched for work during the prior 12 months (or since their last job if it ended within the last 12 months), but not in the most recent 4 weeks. Because they did not actively search for work in the last 4 weeks, they are not classified as unemployed [according to the U-3 measure].” Between June 2025 and December 2025, the U-3 meaure of unemployment increased by 0.3 percentage point, while the U-6 measure increased by 0.7 percentage point.

When asked whether he had advice for his successor as Fed chair, Powell said the Fed chairs should not get pulled into commenting on elective politics and should earn their democratic legitimacy through their interactions with Congress.

Looking forward, Powell repeated the sentiment included in the committee’s statement that: “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

The next FOMC meeting is on March 17–18. One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.)

As of this afternoon, investors assigned a 86.5 percent probability to the committee keeping its target range for the federal funds rate unchanged at 3.50 percent to 3.75 percent at its March meeting. That expectation reflects the view that a solid majority of the committee believes, as Powell indicated in today’s press conference, that the unemployment rate is unlikely to rise significantly in coming months, while the inflation rate is likely to decline as the effects of the tariff increases finish passing through the economy.

PCE Inflation Remains Steady While Real Personal Consumption Spending Rises

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On January 22, the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index and on real personal consumption spending for October and November as part of its “Personal Income and Outlays” report. Because of the federal government shutdown, two months of data were released together with some of the price data for October being imputed because the Bureau of Labor Statistics was unable to collect some consumer price data in that month. The release of data for December has been delayed.

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 November, headline PCE inflation was 2.8 percent, up slightly from 2.7 percent in October. Core PCE inflation in November was also 2.8 percent, up slightly from 2.7 percent in November. Both headline and core PCE inflation for November were equal to the forecast of economists surveyed by the Wall Street Journal.

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 increased from 1.9 percent in October to 2.5 percent in November. Core PCE inflation declined from 2.5 percent in October to 1.9 percent in November. So, both 1-month and 12-month PCE inflation are telling the same story of inflation somewhat above the Fed’s target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure).

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

Headline market-based PCE inflation was 2.5 percent in November, up slightly from 2.4 percent in October. Core market-based PCE inflation was 2.4 percent in November, down slightly from 2.5 percent in October. 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 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.

Data on real personal consumption expenditures were also included in this report. The following figure shows compound annual rates of growth of real personal consumptions expenditures for each month since January 2023. Measured this way, the growth in real personal consumptions expenditures rebounded from 1.3 percent in September to 3.7 percent in both October and October and November.

Strong growth in real personal consumption is consistent with the strong growth in real GDP in the third quarter of 2025 shown in the following figure, which reflects revised data that the BEA released yesterday. Real GDP grew at a compound annual rate of 3.8 percent in October and 4.4 percent in November. indicating a strong rebound in output growth following a 0.6 percent decrease in real GDP in the first quarter of 2025.

Is it likely that real GDP continued its strong growth in the fourth quarter of 2025? Economists at the Federal Reserve Bank of Atlanta prepare nowcasts of real GDP. A nowcast is a forecast that incorporates all the information available on a certain date about the components of spending that are included in GDP. The Atlanta Fed calls its nowcast GDPNow. As the following figure from the Atlanta Fed website shows, today the GDPNow estimate—taking into account this week’s macroeconomic data—is that real GDP grew at an annual rate of 5.4 percent in the fourth quarter of 2025.

These data confirm the widely-held view among economists and investors that the Federal Reserve’s policy-making Federal Open Market committee will keep its target for the federal funds rate unchanged at is next meeting on January 27–28.

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.)

December Jobs Report Shows Employment Up and the Unemployment Rate Down

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This morning (January 9), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for December. Both the increase in employment and the unemployment rate were lower than had been expected.

According to the establishment survey, there was a net increase of 50,000 nonfarm jobs during December. This increase was below the increase of 75,000 net new jobs that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had forecast an increase of 71,000 jobs. In addition, the BLS revised downward its previous estimates of employment in October and November by a combined 76,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

During 2025, the U.S. economy experienced an average monthly net increase of 49,000 jobs, down from an average monthly net increase of 168,000 jobs during 2024.

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure illustrates that monthly job growth has moved erratically since April. The Trump administration announced sharp increases in U.S. tariffs on April 2. Media reports indicate that some firms have slowed hiring due to the effects of the tariffs or in anticipation of those effects.

The unemployment rate decreased from 4.5 percent in November to 4.4 percent in December. The unemployment rate is below the 4.5 percent rate economists surveyed by FactSet had forecast. As the following figure shows, the unemployment rate had been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month May 2024 to July 2025 before breaking out of that range in August. Not that the gap in the figure for October reflects the fact that the federal government shutdown resulted in the BLS not conducting a household survey in that month.

Each month, the Federal Reserve Bank of Atlanta estimates how many net new jobs are required to keep the unemployment rate stable. Given a slowing in the growth of the working-age population due to the aging of the U.S. population and a sharp decline in immigration, the Atlanta Fed currently estimates that the economy would have to create 113,487 net new jobs each month to keep the unemployment rate stable at 4.4 percent. If this estimate is accurate, continuing monthly net job increases of only 50,000 would result in a rising unemployment rate.

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the monthly net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 232,000 jobs in December. (There is no employment estimate from the household survey for October or November.) As an indication of the volatility in the employment changes in the household survey note the very large swings in net new jobs in January and February. In any particular month, the story told by the two surveys can be inconsistent, as was the case this month with employment increasing much more in the household survey than in the employment survey. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those aged 25 to 54. In December the ratio rose to 80.7 percent from 80.6 percent in November. The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is still above what the ratio was in any month during the period from January 2008 to February 2020. The increase in the prime-age employment-population ratio is a particular bright spot in this month’s jobs report.

The following figure shows monthly net changes in federal government employment as measured by the establishment survey. Following the very large net decrease of 179,000 federal government jobs in October, the data for the last two months were more typical of the changes in earlier years with a net increase of 3,000 federal jobs in November and 2,000 jobs in December. In these two months, changes to federal employment had only a small effect on the overall labor market.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. In December, the 1-month rate of wage inflation was 4.0 percent, up from 3.0 percent in November. Both the 1-month and the 12-month data for average hourly earnings show that wage growth remains fairly strong.

What effect might today’s jobs report have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) with respect to setting its target for the federal funds rate? One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) In recent weeks, investors have expected that the FOMC would leave its target for the federal funds rate unchanged at its next meeting on January 27–28. This afternoon, as the following figure shows, investors raised the probability they assign to the committee leaving its target for the federal funds rate unchanged to 95.0 percent from 88.9 percent yesterday. The relatively strong jobs report combined with measures of inflation remaining above the Fed’s 2 percent annual target, makes it likely that the committee will wait to receive additional data on employment, inflation, and GDP before adjusting its federal funds rate target.

CPI Inflation Slows but Some Data Are Missing from Latest Report

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On Thursday (December 18) the Bureau of Labor Statistics (BLS) released its latest report on the consumer price index (CPI). The federal government shutdown, which lasted from October 1 to November 12, is still affecting the macroeconomic statistics being gathered by the BLS and other agencies. The BLS notes in the report:

“BLS did not collect survey data for October 2025 due to a lapse in appropriations. BLS was unable to retroactively collect these data. For a few indexes, BLS uses nonsurvey data sources instead of survey data to make the index calculations. BLS was able to retroactively acquire most of the nonsurvey data for October. CPI data collection resumed on November 14, 2025.”

The following table from the CPI report gives an indication of how much data that is normally collected wasn’t collected in October or November.

Bearing in mind the missing data, the following figure compares headline CPI inflation (the blue bar) and core CPI inflation (the red bar) as reported in this month’s CPI report.

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 November, down from 3.0 in September.
The core inflation rate, which excludes the prices of food and energy, was 2.6 percent in November, down from 3.0 percent in September.

Economists who were surveyed by Fact Set had forecast that both headline inflation and core inflation would rise to 3.1 percent in November. Economists surveyed by the Wall Street Journal also forecast that headline inflation would rise to 3.1 percent in November, but forecast that core inflation would rise slightly less to 3.0 percent. It’s unclear whether the economists were aware at the time they were surveyed how much data for October and November would be missing from this month’s report.

Because of how much data that is normally collected was missing from the calculations of November’s inflation rate, the results should be treated with caution. The Wall Street Journal quoted an economist at the investment bank UBS as advising: “I think you largely just put this one to the side. Maybe this report gives a minor downward sign for overall inflation, but the vast, vast majority of this is just noise and should be ignored.”

Several economists were concerned about the computation the BLS had to make to deal with the lack of direct data on the price of “shelter.” 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 CPI inflation, measured as the percentage change since the same month in the previous year, leaving out the price of shelter. Measured this way, inflation was 2.6 percent in November, which is slightly lower than the 2.7 percent inflation rate the BLS reported when including all items.

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.) The following figure shows 12-month inflation in durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, and services, which are less likely to be affected by tariffs. To make recent changes clearer, we look only at the months since January 2022. In November, inflation in durable goods decreased to 1.8 percent from 2.2 percent in September. Inflation in services in November was 3.2 percent, down from 3.6 percent in September. So the upward pressure on goods prices from the tariffs seems to be declining. But, again, missing data makes it’s unclear to what extent November inflation numbers are representative of what’s actually happening currently to prices.

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. In a press conference after the committee’s most recent meeting, Fed Chair Jerome Powell cautioned against drawing firm conclusions from data for October and November:

“I should mention on the data, as long as I’m talking about it, that we’re going to need to be careful in assessing particularly the household survey data. There are very technical reasons about the way data are collected in some of these measures, both in, you know, inflation and in labor—in the labor market so that the data may be distorted. And not just sort of more volatile, but distorted. And that—it’s—and that’s really because data was not collected in October and half of November. So we’re going to get data, but we’re going to have to look at it carefully and with a somewhat skeptical eye by the time of the January meeting ….”

October and November Jobs Data Give Mixed Picture of the Labor Market

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Because of the federal government shutdown from October 1 to November 12, the regular release by the Bureau of Labor Statistics (BLS) of its monthly “Employment Situation” report (often called the “jobs report”) has been disrupted. The jobs report usually has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

Today, the BLS released a jobs report that has data from the payroll survey for both October and November, but data from the household survey only for November. Because of the government shutdown, the household survey for October wasn’t conducted.

According to the establishment survey, there was a net decrease of 105,000 nonfarm jobs in October and a net increase of 64,000 nonfarm jobs in November. The increase for November was above the increase of 40,000 that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had forecast a net increase of 45,000 jobs. The BLS revised downward by a combined 33,000 jobs its previous estimates of employment in August and September. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure illustrates that, as the BLS notes in the report, nonfarm payroll employment “has shown little net change since April.” The Trump administration announced sharp increases in U.S. tariffs on April 2. Media reports indicate that some firms have slowed hiring due to the effects of the tariffs or in anticipation of those effects. In addition, a sharp decline in immigration has slowed growth in the labor force.

The unemployment rate estimate relies on data collected in the household survey, so there id no unemployment estimate for October. As shown in the following figure, the unemployment rate increased from 4.4 percent in September to 4.6 percent in November, the highest rate since September 2021. The unemployment rate is above the 4.4 percent rate economists surveyed by FactSet had forecast. The unemployment rate had been remarkably stable, staying between 4.0 percent and 4.2 percent in each month from May 2024 to July 2025, before breaking out of that range in August. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is now well above the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 96,000 jobs from September to November. In the payroll survey, there was a net decrease in of 41,000 jobs from September to November. In any particular month, the story told by the two surveys can be inconsistent. In this case, we are measuring the change in jobs over a two month interval because there is no estimate from the household survey of employment in October. Over that two month period the household survey is showing more strength in the labor market than is the payroll survey. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In November the ratio was 80.6 percent, down slightly from 80.7 in September. (Again, there is no estimate for October.) The prime-age employment-population ratio is somewhat below the high of 80.9 percent in mid-2024, but is still above what the ratio was in any month during the period from January 2008 to February 2020. The continued high levels of the prime-age employment-population ratio indicates some continuing strength in the labor market.

The Trump Administration’s layoffs of some federal government workers are clearly shown in the estimate of total federal employment for October, when many federal government employees exhausted their severance pay. (The BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.”) As the following figure shows, there was a decline federal government employment of 162,000 in October, with an additional decline of 6,000 In November. The total decline since the beginning of February 2025 is 271,000. At this point, we can say that the decline in federal employment has had a significant effect on the overall labor market and may account for some of the rise in the unemployment rate.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. In November, the 1-month rate of wage inflation was 1.6 percent, down from 5.4 percent in October. This slowdown in wage growth may be an indication of a weakening labor market. But one month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

What effect might today’s jobs report have on the decisions of the Federal Open Market Committee (FOMC) with respect to setting its target range for the federal funds rate? Today’s jobs report provides a mixed take on the state of the labor market with very slow job growth—although the large decline in federal employment is a confounding factor—a continued high employment-population ratio for prime age workers, and slowing wage growth.

One indication of expectations of future changes in the FOMC’s target for the federal funds rate comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) This morning, investors assigned a 75.6 percent probability to the committee leaving its target range unchanged at 3.50 percent to 3.75 percent at its next meeting on January 27–28. That probability is unchanged from the probability yesterday before the release of the jobs report. Investors apparently don’t see today’s report as providing much new information on the current state of the economy.