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New Data on Inflation and Wage Growth Indicate that Inflation Is Still Running above Target

Photo courtesy of Lena Buonanno

Today (January 31), the BEA released monthly data on the PCE as part of its Personal Income and Outlays report. In addition, the Bureau of Labor Statistics (BLS) released quarterly data on the Employment Cost Index (ECI).

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 (blue line) and core PCE inflation (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. Measured this way, in December PCE inflation (the blue line) was 2.8 percent, unchanged from November. Core PCE inflation (the red line) in December was also 2.8 percent, unchanged from November.

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 rose in December to 3.1 percent from 1.5 percent in November. Core PCE inflation rose in December to 1.9 percent from to 1.3 percent in November. Core inflation is generally a better measure of the underlying trend in inflation. So, 1-month core PCE inflation running below the Fed’s 2 percent target is an encouraging sign. But the usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so data from one month shouldn’t be overly relied on.

Turning to wages, as we’ve noted in earlier posts, the Fed’s policymaking Federal Open Market Committee (FOMC) prefers the employment cost index (ECI) to average hourly earnings (AHE) as a measure of the increase in labor costs.

The AHE is calculated by adding all of the wages and salaries workers are paid—including overtime and bonus pay—and dividing by the total number of hours worked. As a measure of how wages are increasing or decreasing during a particular period, AHE can suffer from composition effects because AHE data aren’t adjusted for changes in the mix of occupations workers are employed in. For example, during a period in which there is a decline in the number of people working in occupations with higher-than-average wages, perhaps because of a downturn in some technology industries, AHE may show wages falling even though the wages of workers who are still employed have risen. In contrast, the ECI holds constant the mix of occupations in which people are employed. The ECI does have this drawback: It is only available quarterly whereas the AHE is available monthly.

The data released this morning indicate that labor costs continue to increase at a rate that is higher than the rate that is likely needed for the Fed to hit its 2 percent price inflation target. The following figure shows the percentage change in the ECI from the same quarter in the previous year. The blue line shows only wages and salaries of private industry workers, while the red line shows total compensation, including non-wage benefits like employer contributions to health insurance, for all civilian workers. The two measures of wage inflation follow similar paths. The rate of increase in the wage and salary measure decreased slightly from 3.9 percent in the third quarter of 2024 to 3.8 percent in the fourth quarter. The movement in the rate of increase in compensation was very similar, also decreasing from 3.9 percent in the third quarter of 2024 to 3.8 percent in the fourth quarter.

If we look at the compound annual growth rate of the ECI—the annual rate of increase assuming that the rate of growth in the quarter continued for an entire year—we find that the rate of increase in wages and salaries increased from 3.1 percent in the third quarter of 2024 to 3.6 percent in the fourth quarter. Similarly, the rate of increase in compensation increased from 3.2 percent in the fourth quarter of 2024 to 3.6 percent in the fourth quarter. So, this measure indicates that there has been some increase in the rate of wage inflation in the fourth quarter, although, again, we have to use caution in interpreting data from only one quarter.

Taken together, the PCE and ECI data released today indicate that the Fed still has a way to go before bringing about a soft landing—returning inflation to its 2 percent target without pushing the economy into a recession.

Real GDP Growth Slows in the Fourth Quarter, While PCE Inflation Remains Above Target

Image generated by ChatGTP-4o illustrating GDP

Today (January 30), the Bureau of Economic Analysis (BEA) released its advance estimate of GDP for the fourth quarter of 2024. (The report can be found here.) The BEA estimates that real GDP increased at an annual rate of 2.3 percent in the fourth quarter—October through December. That was down from the 3.1 percent increase in real GDP in the third quarter. On an annual basis, real GDP grew by 2.5 percent in 2024, down from 3.2 percent in 2023. A 2.5 percent growth rate is still well above the Fed’s estimated long-run annual growth rate in real GDP of 1.8 percent. The following figure shows the growth rate of real GDP (calculated as a compound annual rate of change) in each quarter since the first quarter of 2021.

Personal consumption expenditures increased at an annual rate of 4.2 percent in the fourth quarter, while gross private domestic investment fell at a 5.6 annual rate. As we discuss in this blog post, Fed Chair Jerome Powell’s preferred measure of the growth of output is growth in real final sales to private domestic purchasers. This measure of production equals the sum of personal consumption expenditures and gross private fixed investment. By excluding exports, government purchases, and changes in inventories, final sales to private domestic purchasers removes the more volatile components of gross domestic product and provides a better measure of the underlying trend in the growth of output.

The following figure shows growth in real GDP (the blue line) and in real final sales to private domestic purchasers (the red line) with growth measured as compound annual rates of change. Measured this way, in the fourth quarter of 2024, real final sales to private domestic producers increased by 3.2 percent, well above the 2.3 percent increase in real GDP. Growth in real final sales to private domestic producers was down from 3.4 percent in the third quarter, while growth in real GDP was down from 3.1 percent in third quarter. Overall, using Powell’s preferred measure, growth in production seems strong.

This BEA report also includes data on the private consumption expenditure (PCE) price index, which the FOMC uses to determine whether it is achieving its goal of a 2 percent inflation rate. The following figure shows inflation as measured using the PCE (the blue line) and the core PCE (the red line)—which excludes food and energy prices—since the beginning of 2016. (Note that these inflation rates are measured using quarterly data and as percentage changes from the same quarter in the previous year to match the way the Fed measures inflation relative to its 2 percent target.) Inflation as measured by PCE was 2.4 percent, up slightly from 2.3 percent in the third quarter. Core PCE, which may be a better indicator of the likely course of inflation in the future, was 2.8 percent in the fourth quarter, unchanged since the third quarter. As has been true of other inflation data in recent months, these data show that inflation has declined greatly from its mid-2022 peak while remaining above the Fed’s 2 percent target.

This latest BEA report doesn’t change the consensus view of the overall macroeconomic situation: Production and employment are growing at a steady pace, while inflation remains stubbornly above the Fed’s target.

New PCE Data Show Inflation Slowing

Image generated by GTP-4o of people shopping.

As we discussed in this blog post on Wednesday, the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) voted to reduce its target for the federal funds rate by 0.25 percentage point. After the meeting, the committee released its “Summary of Economic Projections” (SEP). The SEP showed that the committee’s forecasts of the inflation rate as measured by the personal consumption expenditures (PCE) price index for this year and next year are both higher than the committee had forecast in September, when the last SEP was released. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.

This morning (December 20), the BEA released monthly data on the PCE price index as part of its “Personal Income and Outlays” report for November.

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. Measured this way, in November PCE inflation was 2.4 percent, up from 2.3 percent in October. Core PCE inflation in November was 2.8 percent, unchanged from October. Both PCE inflation and core PCE inflation were slightly lower than the expectations of economists surveyed before the data were released.

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 fell sharply in November to 1.5 percent from 2.8 percent in October. Core PCE inflation also fell from 3.2 percent in October to 1.4 percent in November. Although both 12-month PCE inflation and 12-month core PCE inflation remained above the Fed’s 2 percent annual inflation target, 1-month PCE inflation and 1-month core PCE inflation dropped to well below the inflation target. But the usual caution applies that data from one month shouldn’t be overly relied on; it’s far too soon to draw the conclusion that inflation is likely to remain below the 2 percent target in future months.

Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University as another way of measuring the underlying trend in inflation. If we listed the inflation rate for each individual good or service included in the PCE, 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. The following figure from the Federal Reserve Bank of Cleveland includes, along with PCE inflation (the green line) and core PCE inflation (the blue line), median PCE inflation (the orange line). All three inflation rates are measured over 12 months. Median PCE inflation in November was 3.1 percent, unchanged from October.

In his press conference earlier this week, Fed Chair Jerome Powell noted that: “we’ve had recent high readings from non-market services.” 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 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 inflation (the blue line) and 1-month inflation (the red line) for market-based PCE, excluding the prices of food and energy. (The BEA explains the market-based PCE measure here.)

These measures of inflation tell a similar story to the measures considered earlier: 12-month inflation continues to run above the Fed’s 2 percent inflation target, while 1-month inflation slowed significantly in November and is below the 2 percent target. By this measure 12-month inflation was unchanged in November at 2.4 percent, while 1-month inflation declined from 2.5 percent in October to 1.4 percent in November.

To summarize, the less volatile 12-month measures of inflation show it to be persistently above the Fed’s target, while the more volatile 1-month measures show inflation to have fallen below target. If the FOMC were to emphasize the 1-month measures, we might expect them to continue cutting the target for the federal funds rate at the committee’s next meeting on January 28-29. The more likely outcome is that, unless other macroeconomic data that are released between now and that meeting indicate a significant strengthening or weakening of the economy, the committee will leave its target for the federal funds rate unchanged. (The BEA’s next release of monthly PCE data won’t occur until January 31, which is after the FOMC meeting.)

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 shown in the following figure, investors assign a probability of 91.4 percent to the FOMC leaving its target for the federal funds rate at the current range of 4.25 percent to 4.50. Investors assign a probability of only 8.6 percent to the FOMC cutting its target by 0.25 percentage point.

As Expected, FOMC Cuts Target for the Federal Funds Rate by 0.25 Percentage Point

Federal Reserve Chair Jerome Powell speaks at a press conference following a meeting of the Federal Open Market Committee. (Photo from federalreserve.gov)

Members of the Fed’s Federal Open Market Committee (FOMC) had signaled that the committee was likely to cut its target range for the federal funds rate by 0.25 percentage point (25 basis points) at its meeting today (December 18). As we noted in this recent post, investors had overwhelming expected a cut of this size. Although the committee followed through with a 25 basis point cut, Fed Chair Jerome Powell noted in a press conference following the meeting that it was a “closer call” than were the two earlier cuts this year. The statement the committee released after the meeting showed that only one member—Beth M. Hammack, president of the Federal Reserve Bank of Cleveland—ended up voting against the decision to cut the target rate.

In his press conference, Powell noted that although there were some indications that the labor market has weakened, the committee believed that unemployment was likely to remain near the natural rate. The committee also saw real GDP increasing at a steady rate. Powell stated that he was optimistic about the economy and that “I expect another good year next year.” The main obstacle to the committee fulfilling its dual mandate for full employment and price stability is that inflation remains persistently above the Fed’s target of a 2 percent annual inflation rate.

After the meeting, the committee also released a “Summary of Economic Projections” (SEP)—as it typically does at its March, June, September, and December meetings. The SEP presents median values of the committee members’ forecasts of key economic variables. The values are summarized in the following table, reproduced from the release.

The forecasts mirror the points that Powell made in his news conference:

Committee members now forecast that GDP will be higher in 2024, and that the unemployment rate will be lower, than they had forecast in September.
Committee members now forecast that both personal consumption expenditures (PCE) price inflation and core PCE inflation will be slightly higher in 2024 than they had forecast in September.
Most notably, whereas in September committee members had forecast that PCE inflation would be 2.1 percent in 2025, they now forecast it will be 2.5 percent—notably higher. And committee members now forecast that inflation will not fall to the Fed’s 2 percent target until 2027, rather than 2026.
Finally, committee members now project that the federal funds rate will end 2025 50 basis points lower than it is now, rather than 100 basis points lower. In other words, committee members ares now forecasting only two 25 basis point cuts in the target next year rather than the four cuts they had forecast in September.

In his press conference, Powell noted that the main reason that PCE inflation remains high is that inflation in the prices of housing services has been running high, as have the prices of some other services. Noting that monetary policy affects the economy “with long and variable lags,” Powell stated that he believes that inflation is still on track to fall to the 2 percent target.

Given that inflation has been running closer to 2.5 percent and that the committee expects the inflation rate will still be 2.5 percent next year, a reporter asked Powell if the committee had considered the possibility of accepting a 2.5 percent inflation rate in the long run. Powell replied that: “No. We’re not going to settle for [2.5 percent inflation].” He stated that a 2 percent inflation rate is what the Fed “owes the public.”

Finally, Powell indicated that the committee would have to take into account the effects of the incoming Trump Administration’s fiscal policy actions—particularly tariff increases—when they occur. President Trump has stated that he would like to see interest rates decline more quickly, so the committee may face criticism for keeping the target for the federal funds rate higher next year than they had originally intended.

Latest PCE Inflation Data Indicate that Fed May Struggle to Achieve a Soft Landing

An image generated by GTP-4o of people shopping

This morning (November 27), the BEA released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report for October. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. This month’s data indicates that progress towards the Fed’s target may have stalled.

The following figure shows PCE inflation (blue line) and core PCE inflation (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. Measured this way, in October, PCE inflation (the blue line) was 2.3 percent, up from 2.1 percent in September. Core PCE inflation (the red line) in October was 2.8 percent, up from 2.7 percent in September. Both PCE inflation and core PCE inflation were in accordance with the expectations of economists surveyed.

One reason that PCE inflation has been lower than core PCE inflation in recent months is that PCE inflation has been held down by falling energy prices, as shown in the following figure. Energy prices have been falling over the last three months and were down 5.9 percent in October. It seems unlikely that falling energy prices will persist.

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 rose in October to 2.9 percent from 2.1 percent in September. Core PCE inflation rose from 3.2 percent in September to 3.3 percent in October. Because core inflation is generally a better measure of the underlying trend in inflation, both 12-month and 1-month core PCE inflation indicate that inflation may still run well above the Fed’s 2 percent target in coming months. But the usual caution applies that data from one month shouldn’t be overly relied on.

Inflation in services remained high, increasing from 3.7 percent in September to 3.9 percent in October. Core inflation, measured by excluding housing as well as food and energy, increased from 2.1 percent in September to 2.4 percent in October.

Some Fed watchers have suggested that higher inflation readings may lead he Fed’s policymaking Federal Open Market Committee (FOMC) to leave its target for the federal funds rate unchanged at its next meeting on December 17-18. As of today, however, investors who buy and sell federal funds futures contracts are still expecting that the FOMC will reduce its target by 0.25 percent (25 basis points) at its next meeting. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, investors assign a probability of 70 percent to the FOMC cutting its target for the federal funds rate from the current range of 4.50 percent to 4.75 percent to a range of 4.25 percent to 4.50 percent. Investors assign a probability of only 30 percent to the FOMC leaving its target unchanged.

Since the FOMC began increasing the target for the federal funds rate in the spring of 2022, economists have discussed three possible outcomes of the Fed’s monetary policy:

A hard landing, with the economy only returning to the Fed’s 2 percent inflation target if the U.S. economy experiences a recession
A soft landing, with the economy returning to 2 percent inflation without experiencing a recession.
No landing, with the economy not experiencing a recession but with inflation remaining persistently above the Fed’s 2 percent target.

With GDP and employment data showing no indication that a recession will begin soon and with today’s data showing inflation—while having declined substantially from its mid-2022 peak—remaining above the Fed’s 2 percent target, the chances of the no landing outcome seem to be increasing.

New Data on Inflation and Wage Growth Indicate that the Fed Is Still Not Assured of Hitting Its Inflation Target

Photo courtesy of Lena Buonanno.

Yesterday, the Bureau of Economic Analysis (BEA) released quarterly data on the personal consumption expenditures (PCE) price index as part of its advance estimate of third quarter GDP. (We discuss that release in this blog post.) Today, the BEA released monthly data on the PCE as part of its Personal Income and Outlays report. In addition, the Bureau of Labor Statistics (BLS) released quarterly data on the Employment Cost Index (ECI).

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 (blue line) and core PCE inflation (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. Measured this way, in September PCE inflation (the blue line) was 2.1 percent, down from 2.3 percent in August. Core PCE inflation (the red line) in September was 2.7 percent, which was unchanged from August. PCE inflation was in accordance with the expectations of economists surveyed by the Wall Street Journal, but core inflation was higher than expected.

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 rose in September to 2.1 percent from 1.4 percent in August. Core PCE inflation rose from 1.9 percent in August to 3.1 percent in June. Because core inflation is generally a better measure of the underlying trend in inflation, both 12-month and 1-month core PCE inflation indicate that inflation may still run above the Fed’s 2 percent target in coming months. But the usual caution applies that data from one month shouldn’t be overly relied on.

Turning to wages, as we’ve noted in earlier posts, as a measure of the rate of increase in labor costs, the Fed’s policy-making Federal Open Market Committee (FOMC) prefers the ECI to average hourly earnings (AHE).

The data released this morning indicate that labor costs continue to increase at a rate that is higher than the rate that is likely needed for the Fed to hit its 2 percent price inflation target. The following figure shows the percentage change in the employment cost index for all civilian workers from the same quarter in 2023. The blue line shows only wages and salaries while the red line shows total compensation, including non-wage benefits like employer contributions to health insurance. The rate of increase in the wage and salary measure decreased from 4.0 percent in the second quarter of 2024 to 3.8 percent in the third quarter. The movement in the rate of increase in compensation was very similar, decreasing from 4.1 percent in the second quarter of 2024 to 3.9 percent in the third quarter.

If we look at the compound annual growth rate of the ECI—the annual rate of increase assuming that the rate of growth in the quarter continued for an entire year—we find that the rate of increase in wages and salaries decreased from 3.4 percent in the second quarter of 2024 to 3.1 percent in the third quarter. Similarly, the rate of increase in compensation decreased from 3.7 percent in the second quarter of 2024 to 3.2 percent in the third quarter. So, this measure indicates that there has been some easing of wage inflation in the third quarter, although, again, we have to use caution in interpreting one quarter’s data.

Some economists and policymakers prefer to look at the rate of increase in ECI for private industry workers rather than for all civilian workers because the wages of government workers are less likely to respond to inflationary pressure in the labor market. The first of the following figures shows the rate of increase of wages and salaries and in total compensation for private industry workers measured as the percentage increase from the same quarter in the previous year. The second figure shows the rate of increase calculated as a compound growth rate.

Both figures show results consistent with the 12-month PCE inflation figures: A decrease in wage inflation during the third quarter compared with the second quarter but with wage inflation still running somewhat above the level consistent with the Fed’s 2 percent price inflation target.

Taken together, the PCE and ECI data released today indicate that the Fed has not yet managed to bring about soft landing—returning inflation to its 2 percent target without pushing the economy into a recession. As we noted in yesterday’s post, although output growth remains strong, there are some indications that the labor market may be weakening. If so, future months may see a further decrease in wage growth that will make it more likely that the Fed will hit its inflation target. The BLS is scheduled to release its “Employment Situation” report for October on Friday, November 1. That report will provide additional data for assessing the current state of the labor market.

Real GDP Growth Comes in Slightly Below Expectations, Inflation Is Below Target, and the Labor Market Shows Some Weakening

Image of GDP generated by GTP-4o

This week, two data releases paint a picture of the U.S. economy as possibly slowing slightly, but still demonstrating considerable strength. The Bureau of Economic Analysis (BEA) released its advance estimate of GDP for the third quarter of 2024. (The report can be found here.) The BEA estimates that real GDP increased by 2.8 percent at an annual rate in the third quarter—July through September. That was down from the 3.0 percent increase in real GDP in the second quarter and below the 3.1 percent that economists surveyed by the Wall Street Journal had expected. The following figure from the BEA report shows the growth rate of real GDP in each quarter since the fourth quarter of 2020.

Two other points to note: In June, the Congressional Budget Office (CBO) had forecast that the growth rate of real GDP in the third quarter would be only 2.1 percent. The CBO forecasts that, over the longer run, real GDP will grow at a rate of 1.7 to 1.8 percent per year. So, the growth rate of real GDP according to the BEA’s advance estimate (which, it’s worth recalling, is subject to potentially large revisions) was above expectations from earlier this year and above the likely long run growth rate.

Consumer spending was the largest contributor to third quarter GDP growth. The following figure shows growth rates of real personal consumption expenditures and the subcategories of expenditures on durable goods, nondurable goods, and services. There was strong growth in each component of consumption spending. The 8.1 percent increase in expenditures on durables was particularly strong. It was the second quarter in a row of strong growth in spending on durables after a decline of –1.8 percent in the first quarter.

Investment spending and its components were a more mixed bag, as shown in the following figure. Investment spending is always more volatile than consumption spending. Overall, gross private domestic investment increased at a slow rate of 0.3 percent—the slowest rate since a decline in the first quarter of 2023. Residential investment decreased by 5.1 percent, reflecting difficulties in residential construction due to mortgage interest rates remaining high. Business fixed investment grew 3.1 percent, powered by an increase of 11.1 percent in spending on business equipment. Spending on structures—such as factories and office buildings—had increased rapidly over the past two years before slowing to a 0.2 percent increase in the second quarter and a decline of 4.0 percent in the fourth quarter.

The GDP report also contained data on the private consumption expenditure (PCE) price index, which the FOMC uses to determine whether it is achieving its goal of a 2 percent inflation rate. The following figure shows inflation as measured using the PCE and the core PCE—which excludes food and energy prices—since the beginning of 2016. (Note that these inflation rates are measured using quarterly data and as compound annual rates of change.) Despite the strong growth in real GDP, inflation as measured by PCE was only 1.5 percent, below the 2.5 percent increase in the second quarter and below the Federal Reserve’s 2.0 percent inflation target. Core PCE, which may be a better indicator of the likely course of inflation in the future, declined to 2.2 percent in the third quarter from 2.8 percent in the second quarter. The third quarter increase was slightly above the rate that economists surveyed by the Wall Street Journal had expected.

This week, the Bureau of Labor Statistics (BLS) released its “Job Openings and Labor Turnover” (JOLTS) report for September 2024. The report provided data indicating some weakening in the U.S. labor market. The following figure shows the rate of job openings. 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 and the rate of job openings as the number of job openings divided by the number of job openings plus the number of employed workers, multiplied by 100. The 4.9 percent job opening rate in September continued the slow decline from the peak rate of 7.4 percent in March 2022. The rate is also slightly below the rate during late 2018 and 2019 before the Covid pandemic.

In the following figure, we compare the total number of job openings to the total number of people unemployed. The figure shows a slow decline from a peak of more than 2 job openings per unemployed person in the spring of 2022 to 1.1 job openings per employed person in September 2024, somewhat below the levels in 2019 and early 2020, before the pandemic. Note that the number is still above 1.0, indicating that the demand for labor is still high, although no higher than during the strong labor market of 2019.

Finally, note from the figure that over the period during which the BLS has been conducting the JOLTS survey, the rate of job openings has declined just before and during recessions. Does that fact indicate that the decline in the job opening rate in recent months is signaling that a recession is likely to begin soon? We can’t say with certainty, particularly because the labor market was severely disrupted by the pandemic. The decline in the job openings rate since 2022 is more likely to reflect the labor market returning to more normal conditions than a weakening in hiring that signals a recession is coming.

To summarize these data:

Real GDP growth is strong, although below what economists had been projecting.
Inflation as measured by the PCE is below the Fed’s 2 percent target, although core inflation remains slightly above the target.
The job market has weakened somewhat, although there is no strong indication that a recession will happen in the near future.

Latest PCE Report Shows Inflation Continuing to Fall

On September 27, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for August, which includes monthly data on the personal consumption expenditures (PCE) price index. Inflation as measured by annual changes in the consumer price index (CPI) receives the most attention in the media, but the Federal Reserve looks instead to inflation as measured by 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 (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the percentage change in the PCE from the same month in the previous year. Measured this way, PCE inflation (the blue line) was 2.2 percent in August, down from 2.7 percent in July. Core PCE inflation (the red line) ticked up in August to 2.7 percent from 2.6 percent in July.

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 from 1.9 percent in July to 1.1 percent in August, well below the Fed’s 2 percent inflation target. Core PCE inflation declined from 1.9 percent in July to 1.6 percent in August. Calculating inflation this way focuses only on the most recent data, and so reinforces the conclusion that inflation has slowed significantly from the higher rates seen at the beginning of this year.

The following figure shows other ways of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above—although note that PCE inflation is now the red line rather than the blue line), inflation as measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the blue line). Fed Chair Jerome Powell and other members of the Federal Open Market Committee (FOMC) have said that they are concerned by the persistence of elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.

Inflation using the trimmed mean measure was 2.7 percent in August (calculated as a 12-month inflation rate), down only slightly from 2.6 percent in July—still above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in August at 3.7 percent, the same as in July.

Today’s data indicate that the economy is still on a path for a soft landing in which the inflation rate returns to the Fed’s 2 percent target without the economy slipping into a recession. Looking forward, both the Federal Bank of Atlanta’s GDPNow forecast and the Federal Reserve Bank of New York’s GDP Nowcast project that real GDP will increase at annual rate of more than 3 percent in the third quarter (which ends in three days). So, at this point there is no indication that the economy is slipping into a recession. The next Employment Situation report will be released on October 4 and will provide more information on the state of the labor market.

Fed Governor Michelle Bowman Explains Her Dissenting Vote at the FOMC Meeting

Federal Reserve Governor Michelle Bowman (Photo from federalreserve.gov)

Federal Reserve Chairs place a high value on consensus, particularly with respect to the decisions of the Federal Open Market Committee (FOMC) setting the target for the federal funds rate. (Note that the chair of the Fed’s Board of Governors also serves as the chair of the FOMC.) As we discuss in Macroeconomics, Chapter 14, Section 14.4 (Economics, Chapter 24, Sectio 24.4), the FOMC has 12 voting members: the 7 members of the Board of Governors, the president of the Federal Reserve Bank of New York, and 4 of the other 11 District Bank presidents, who serve rotating one-year terms.

Decisions by the FOMC in setting the target for the federal funds rate are usually unanimous. Prior to the FOMC meeting on September 17-18, each vote of the committee had been unanimous since Esther George, president of the Federal Reserve Bank of Kansas City cast a dissenting vote at the meeting on June 14-15, 2022. At that meeting, the committee voted to raise its target for the federal funds rate by 0.75 percentage point (75 basis points). George voted against the move because she believed a 0.50 percentage point (50 basis points) increase would have been more appropriate.

At the September 17-18 meeting, Fed Governor Michelle Bowman voted against the decision to reduce the target for the federal funds rate by 50 basis points because she believed a cut of 25 basis point would have been more appropriate. She was the first member of the Board of Governors to cast a dissenting vote at an FOMC meeting since 2005.

Perhaps because it’s unusual for a member of the Board of Governors to dissent from an FOMC decision, Bowman issued a statement explaining her vote. In her statement, Bowman argued that although inflation has declined substantially over the past two years, she was concerned that inflation as measured by the 12-month percentage change in the core personal consumption expenditures (PCE) price index was still 2.5 percent—above the Fed’s target inflation rate of 2 percent: “Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5 percent, I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate.” (Note that the Fed uses the PCE rather than the core PCE to gauge whether it is hitting its inflation target, but core PCE is generally thought to be a better indicator of the underlying inflation rate.)

Bowman also noted the difficulty of interpreting developments in the labor market: “My reading of labor market data has become more uncertain due to increased measurement challenges and the inherent difficulty in assessing the effects of recent immigration flows.” (We discuss the effects on employment measures of differing estimates of the level of immigration in this blog post.)

Latest PCE Report Indicates that Inflation May Be Approaching the Fed’s Target

The result when asking GTP-4o to generate “an image illustrating inflation.”

Inflation, as measured by changes in the personal consumption expenditures (PCE) price index, continued a slow decline that began in March. (The Fed uses annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.) On August 30, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for July, which contains monthly PCE data.

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the percentage change in the PCE from the same month in the previous year. Measured this way, in July PCE inflation (the blue line) was 2.5 percent, the same as in June. Core PCE inflation (the red line) in July was 2.6 percent, which was also unchanged from June.

The following figure shows another way of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above), inflation measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the red line). Fed Chair Jerome Powell and other members of the Federal Open Market Committee (FOMC) have said that they are concerned by the persistence of elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.

Inflation using the trimmed mean measure was 2.7 percent in July (calculated as a 12-month inflation rate), down only slightly from 2.8 percent in June—and still above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in July at 3.7 percent, although down from 3.9 percent in June.

On balance, taking together these various measures, inflation seems on track to return to the Fed’s 2 percent target. As we noted in this earlier post, last week in a speech at the Federal Reserve Bank of Atlanta’s monetary policy symposium in Jackson Hole, Wyoming , Fed Chair Jerome Powell all but confirmed that the the Fed’s policy-maiking Federal Open Market Committee (FOMC) will cut its target for the federal funds rate at its next meeting on September 17-18. There was nothing in this latest PCE report to reduce the likelihood of the FOMC cutting its target at that meeting by an expected 0.25 percent point from a range of 5.25 percent to 5.50 percent to a range of 5.00 percent to 5.25 percent. There also is nothing in the report that would increase likelihood that the committee will cut its target by 0.50 percentage point, as many investors expected following the weak employment report released by the Bureau of labor Statistics (BLS) at the beginning of August. (We discuss this report and the reaction among investors in this post.)