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CPI Inflation for September Slightly Below Forecasts but Still Above Target

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As we’ve noted in recent blog posts (here and here), the shutdown of the federal government has interrupted the release of government data, including the “Employment Situation” report prepared monthly by the Bureau of Labor Statistics (BLS). The federal government made an exception for the BLS report on the consumer price index (CPI) because annual cost-of-living increases in Social Security payments are determined by the average inflation rate in the CPI during July, August, and September.

Accordingly, today (October 24), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for September. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 3.0 percent in September, up from 2.9 percent in August.
The core inflation rate, which excludes the prices of food and energy, was also 3.0 percent in September, down slightly from 3.1 percent in August.

Headline inflation and core inflation were both slightly lower than the 3.1 rate for both measures that economists had expected.

In the following figure, we look at the 1-month inflation rates for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) declined from the very high rate of 4.7 percent in August to the still high rate of 3.8 percent in September. Core inflation (the red line) declined from 4.2 percent in August to 2.8 percent in September.

The 1-month and 12-month inflation rates are both indicating that inflation remains well above the Fed’s 2 percent annual inflation target in September. Core inflation—which is often a good indicator of future inflation—in particular has been running well above target during the last three months.

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.

Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that many of the tariff increases announced on April 2 have since been reduced.) The following figure shows 12-month inflation in durable goods—such as furniture, appliances, and cars—which are likely to be affected directly by tariffs, all core goods, and core services. Services are less likely to be affected by tariffs.. To make recent changes clearer, we look only at the months since January 2022. In August, inflation in durable goods declined slightly to 1.8 percent in September from 1.9 percent in August. Inflation in core goods was unchanged in September at 1.5 percent. Inflation in core services fell slightly in September to 3.5 percent from 3.6 percent in August.

The following figure shows 1-month inflation in the prices of these products, which may makes clearer the effects of the tariff increases. In September, durable goods inflation was a high 4.0 percent, although down from 5.1 percent in August. Core goods inflation in September was 2.7 percent, down from 3.4 percent in August. Core service inflation was 2.9 percent in August, down from 4.3 percent in August.

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

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

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.2 percent in September, down slightly from 3.3 August. Twelve-month median inflation (the red line) 3.5 percent in September, down slightly from 3.6 in August.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation declined from 3.2 percent in August to 2.4 percent in September. One-month median inflation declined from 3.4 percent in August to 2.4 percent in September. These data are consistent with the view that inflation is still running above the Fed’s 2 percent target.

With inflation running above the Fed’s 2 percent annual target, we wouldn’t typically expect that the Fed’s policymaking Federal Open Market Committee (FOMC) would cut its target for the federal funds rate at its October 28–29 meeting. At this point, though, it seems likely that the FOMC will “look through” the higher inflation rates of the last few months because the higher rates may be largely attributable to one-time price increases caused by tariffs. Committee members have signaled that they are likely to cut their target for the federal funds rate by 0.25 percentage point (25 basis points) at the conclusion of next week’s meeting.

This morning, investors who buy and sell federal funds futures contracts assign a probability of 96.7 percent to the FOMC cutting its target for the federal funds rate at that meeting by 25 basis points from its current target range of 4.00 percent to 4.25 percent. Investors assign a 95.9 percent probability of the committee cutting its target by an additional 25 basis points to 3.50 percent to 3.75 percent at its December 9–10 meeting. If persistently high inflation rates reflect more than just the temporary effects of tariffs, these rate cuts will make it unlikely that the Fed will reach its 2 percent inflation target anytime soon.

Fed Has Apparently Lost Early Access to ADP Employment Data

Fed Governor Christopher Wallace on October 21, 2025 at the Fed’s Payment Innovation Conference (photo from federalreserve.gov)

The current partial shutdown of the federal government has delayed the release by the Bureau of Labor Statistics (BLS) of its “Employment Situation” report (often called the “jobs report”). The report had originally been scheduled to be released on October 3. In a recent blog post we discussed how well the employment data collected by the private payroll processing firm Automatic Data Processing (ADP) serves as an alternative measure of the state of the labor market. In that post we showed that ADP data on total private payroll employment tracks fairly well the BLS data on total private employment from its establishment survey (often called the payroll survey) .

An article in today’s Wall Street Journal reports that ADP has stopped providing the Fed with early access to its data. Apparently, as a public service ADP had been providing its data to the Fed a week before the data was publicly released. The article notes that ADP stopped providing the data soon after this speech delievered by Fed Governor Christopher Wallace in late August. In a footnote to the speech Wallace refers to “data that Federal Reserve staff maintains in collaboration with the employment services firm ADP.” The article points out, though, that Waller’s speech was only one of several times since 2019 that a Fed official has publicly mentioned receiving data from ADP.

Losing early access to the ADP data comes at a difficult time for the Fed, given that the BLS employment data are not available. In addition, the labor market has shown signs of weakening even though growth has remained strong in measures of output. If payroll employment has been falling, rather than growing slowly as it was in the August jobs report, that knowledge would affect the deliberations of the Fed’s policymaking Federal Open Market Committee (FOMC) at its next meeting on October 28–29. Serious deterioration in the labor market could lead the FOMC to cut its target for the federal funds rate by more than the expected 0.25 percentage point (25 basis points).

In a speech in 2019, Fed Chair Jerome Powell noted that the Fed staff had used ADP data to develop a new measure of payroll employment. Had that measure been available in 2008, Powell argued, the FOMC would have realized earlier than it did that employment was being severely affected by the deepening of the financial crisis:

“[I]n the first eight months of 2008, as the Great Recession was getting underway, the official monthly employment data showed total job losses of about 750,000. A later benchmark revision told a much bleaker story, with declines of about 1.5 million. Our new measure, had it been available in 2008, would have been much closer to the revised data, alerting us that the job situation might be considerably worse than the official data suggested.”

The Wall Street Journal article notes that Powell has urged ADP to resume sharing its employment data with the Fed.

Real GDP Growth Revised Up and PCE Inflation Running Slightly Below Expectations

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Today (September 26), the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. Yesterday, the BEA released its revised estimate of real GDP growth in the second quarter. Taken together, the two reports show that economic growth remains realtively strong and that inflation continues to run above the Fed’s 2 percent annual target.

Taking the inflation report first, the following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2018, with inflation measured as the percentage change in the PCE from the same month in the previous year. In August, headline PCE inflation was 2.7 percent, up from 2.6 percent in July. Core PCE inflation in August was 2.9 percent, unchanged from July. Headline PCE inflation was equal to the forecast of economists surveyed, while core PCE inflation was slightly lower than forecast.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, headline PCE inflation increased from 2.0 percent in July to 3.2 percent in August. Core PCE inflation declined slightly from 2.9 percent in July to 2.8 percent in August. So, both 1-month and 12-month PCE inflation are telling the same story of inflation being well above the Fed’s target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure). In addition, these data likely reflect higher prices resulting from the tariff increases the Trump administration has implemented. Once the one-time price increases from tariffs have worked through the economy, inflation may decline. It’s not clear, however, how long that may take and President Trump indicated yesterday that he may impose new tariffs on pharmaceuticals, large trucks, and furniture.

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

Headline market-based PCE inflation was 2.4 percent in August, unchanged from July. Core market-based PCE inflation was 2.6 percent in August, also unchanged from July. 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 increase sharply to 2.5 percent in August from 0.9 percent in July. One-month core market-based inflation increased slightly to 1.9 percent in August from 1.8 percent in July. 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.

Inflation running above the Fed’s 2 percent target is consistent with relatively strong growth in real GDP. The following figure shows compound annual rates of growth of real GDP, for each quarter since the first quarter of 2023. The value for the second quarter of 2025 is the BEA’s third estimate. This revised estimate increased the growth rate of real GDP to 3.8 percent from the second estimate of 3.3 percent.

The most important contributor to real GDP growth was growth in real personal consumption expenditures, which, as shown in the following figure, increased aat compound annual rate of 2.5 percent in the second quarter, up from 0.6 percent in the first quarter.

High interest rates continue to hold back residential construction, which declined by a compound annual rate of 5.1 percent in the second quarter after declining 1.0 percent in the first quarter.

Business investment in structures, such as factories and office buildings, continued a decline that began in the first quarter of 2024.

Will the relatively strong growth in real GDP in the second quarter continue in the third quarter? 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 forecast is for real GDP to grow at an annual rate of 3.9 percent in the third quarter.

Finally, the macroeconomic data released in the last two days has had realtively little effect on the expectations of investors trading federal funds rate futures. Investors assign an 89.8 percent probability to the Federal Open Market Committee (FOMC) cutting its target for the federal funds rate at its meeting on October 28–29 by 0.25 percentage point (25 basis points) from its current range of 4.00 percent to 4.25 percent. That probability is only slightly lower than 91.9 percent probaiblity that investors had assigned to a 25 basis point cut a week ago. However, the probability of the committee cutting its target rate by another 25 basis points at its December 9–10 fell to 67.0 percent today from 78.6 percent one week ago.

Unusual FOMC Meeting Leads to Expected Result of Rate Cut

Photo of Fed Chair Jerome Powell from federalreserve.gov

Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) occurred against a backdrop of President Trump pressuring the committee to reduce its target for the federal funds rate. In a controversial move, Trump nominated Stephen Miran, chair of Council of Economic Advisers (CEA), to fill an open seat on the Fed’s Board of Governors. Miran took a leave of absence from the CEA rather than resign his position, which made him the first member of the Board of Governors in decades to maintain an appointment elsewhere in the executive branch while serving on the Board. In addition, Trump had fired Governor Lisa Cook on the grounds that she had committed fraud in applying for a mortgage at a time before her appointment to the Board. Cook denied the charge and a federal appeals court sustained an injunction allowing her to participate in today’s meeting.

As most observers had expected, the committee decided today to lower its target for the federal funds rate from a range of 4.25 percent to 4.50 percent to a range of 4.00 percent to 4.25 percent—a cut of 0.25 percentage point, or 25 basis points. The members of the committee voted 11 to 1 for the 25 basis point cut with Miran dissenting because he preferred a 50 basis point cut.

The following figure shows, for the period since January 2010, the upper bound (the blue line) and lower bound (the green line) for the FOMC’s target range for the federal funds rate and the actual values of the federal funds rate (the red line) during that time. 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 in its target range in Macroeconomics, Chapter 15, Section 15.2 (Economics, Chapter 25, Section 25.2).)

After the meeting, the committee also released a “Summary of Economic Projections” (SEP)—as it typically does after its March, June, September, and December meetings. The SEP presents median values of the 19 committee members’ forecasts of key economic variables. The values are summarized in the following table, reproduced from the release. (Note that only 5 of the district bank presidents vote at FOMC meetings, although all 12 presidents participate in the discussions and prepare forecasts for the SEP.)

There are several aspects of these forecasts worth noting:

Committee members slightly increased their forecasts of real GDP growth for each year from 2025 through 2027. Committee members also slightly decreased their forecasts of the unemployment rate in 2026 and 2027. They left their forecast of unemployment in the fourth quarter of 2025 unchanged at 4.5 percent. (The unemployment rate in August was 4.3 percent.)
Committee members left their forecasts for personal consumption expenditures (PCE) price inflation unchanged for 2025 and 2026, while raising their forecast for 2026 from 2.4 percent to 2.6 percent. Similarly, their forecasts of core PCE inflation were unchanged for 2025 and 2027 but increased from 2.4 percent to 2.6 percent for 2026. The committee does not expect that PCE inflation will decline to the Fed’s 2 percent annual target until 2028.
The committee’s forecast of the federal funds rate at the end of 2025 was lowered from 3.9 percent in June to 3.6 percent today. They also lowered their forecast for federal funds rate at the end of 2026 from 3.6 percent to 3.4 pecent and at the end of 2027 from 3.4 percent to 3.1 percent.

Prior to the meeting there was much discussion in the business press and among investment analysts about the dot plot, shown below. Each dot in the plot represents the projection of an individual committee member. (The committee doesn’t disclose which member is associated with which dot.) Note that there are 19 dots, representing the 7 members of the Fed’s Board of Governors and all 12 presidents of the Fed’s district banks.

The plots on the far left of the figure represent the projections of each of the 19 members of the value of the federal funds rate at the end of 2025. Ten of the 19 members expect that the committee will cut its target range for the federal funds rate by at least 50 basis points in its two remaining meetings this year. That narrow majority makes it likely that an unexpected surge in inflation during the next few months might result in the target range being cut by only 25 basis points or not cut at all. Members of the business press and financial analysts are expecting tht the committee will implement a 25 basis point cut in each of its last two meetings this year.

During his press conference following the meeting, Powell indicated that the recent increase in inflation was largely due to the effects of the increase in tariff rates that the Trump administration began implementing in April. (We discuss the recent data on inflation in this post.) Powell indicated that committee members expect that the tariff increases will cause a one-time increase in the price level, rather than causing a long-term increase in the inflation rate. Powell also noted recent slow growth in real GDP and employment. (We discuss the recent employment data in this blog post.) As a result, he said that the shift in the “balance of risks” caused the committee to believe that cutting the target for the federal funds rate was warranted to avoid the possibility of a significant rise in the unemployment rate.

The next FOMC meeting is on October 28–29 by which time the status of Lisa Cook on the committee may have been clarified. It also seems likely that President Trump will have named the person he intends to nominate to succeed Powell as Fed chair when Powell’s term ends on May 15, 2026. (Powel’s term on the Board doesn’t end until January 31, 2028, although Fed chairs typically resign from the Board if they aren’t reappointed as chair). And, of course, additional data on inflation and unemployment will also have been released.

CPI Inflation Worsens, as Expected

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

The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.9 percent in August, up from 2.7 in July.
The core inflation rate, which excludes the prices of food and energy, was 3.1 percent in August, up slightly from 3.0 percent in July.

Headline inflation and core inflation were both the same as economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) jumped from 2.4 percent in July to 4.7 percent in August. Core inflation (the red line) increased from 3.9 percent in July to 4.2 percent in August.

The 1-month and 12-month inflation rates are both indicating that inflation accelerated in August. Core inflation—which is often a good indicator of future inflation—in particular has been running well above the Fed’s 2 percent inflation target during the last two months.

Core inflation had been running significantly higher than headline inflation in the past few months because gasoline prices had generally been falling since February. Gasoline prices turned around in August, however, increasing at a 25.5 percent annual rate. As shown in the following figure, 1-month inflation in gasoline prices moves erratically—which is the main reason that gasoline prices aren’t included in core inflation.

Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that many of the tariff increases announced on April 2 have since been reduced) The following figure shows 12-month inflation in 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 August, inflation in durable goods increased to 1.9 percent from 1.2 percent in July. Inflation in services in August was 3.8 percent, unchanged from July.

The following figure shows 1-month inflation in the prices of these products, which may make the effects of tariffs clearer. In August, durable goods inflation was 5.1 percent up from 4.5 percent in July. Service inflation was 3.9 percent in August, down slightly from 4.0 percent in July. Inflation in goods and services both running well above 2 percent is not good news for inflation falling back to the Fed’s 2 percent target in the near future.

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

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

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.3 percent in August, up slightly from 3.2 July. Twelve-month median inflation (the red line) 3.6 percent in August, unchanged from July.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation rose from 2.9 percent in July to 3.2 percent in August. One-month median inflation remained unchanged at 3.4 percent in August. These data are consistent with the view that inflation is running above the Fed’s 2 percent target.

The CPI inflation data combined with the recent jobs data (which we discuss here and here), indicate that the U.S. economy may be entering a period of stagflation—a combination of rising inflation with falling, or stagnating, output. Stagflation poses a policy dilemma for the Fed’s policymaking Federal Open Market Committee (FOMC) because cutting its target for the federal funds rate to increase economic growth and employment may worsen inflation. At this point, it seems likely that the FOMC will “look through” this month’s rising inflation because it may be largely due to one-time price increases caused by tariffs. Committee members have signaled that they are likely to cut their target for the federal funds rate by 0.25 percent (25 basis points) at the conclusion of their meeting on September 16–17 and again at the conclusion of the following meeting on October 28–29.

Weak Jobs Report Provides Further Evidence of Labor Market Softening

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This morning (September 5), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for August. The data in the report show that the labor market was weaker than expected in August.

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 only 22,000 nonfarm jobs during August. This increase was well below the increase of 110,000 that economists surveyed by FactSet had forecast. Economists surveyed by the Wall Street Journal had forecast a smaller increase of 75,000 jobs. In addition, the BLS revised downward its previous estimates of employment in June and July by a combined 21,000 jobs. The estimate for June was revised from a net gain of 14,000 to a net loss of 13,000. This was the first month with a net job loss since December 2020. (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 makes clear the striking deceleration in job growth 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 increased from 4.2 percent in July to 4.3 percent in August, the highest rate since October 2021. The unemployment rate is above the 4.2 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. In June, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate during the fourth quarter of 2025 would average 4.5 percent. The unemployment rate would still have to rise significantly for that forecast to be accurate.

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 97,591 net new jobs each month to keep the unemployment rate stable at 4.3 percent. If this estimate is accurate, continuing monthly net job increases of 22,000 would result in a 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 net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 288,000 jobs in August, following a net decrease of 260,000 jobs in July. 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 August the ratio rose to 80.7 percent from 8.4 percent in July. 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 bright spot in this month’s jobs report.

It is still unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in federal government employment of 15,000 in August and a total decline of 97,000 since the beginning of February 2025. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has had a small effect on the overall labor market.

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 August, down from an increase of 3.9 percent in July.

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 August, the 1-month rate of wage inflation was 3.3 percent, down from 4.0 percent in July. This slowdown in wage growth may be another 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 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.) As we’ve noted in earlier blog posts, since the weak July jobs report, investors have assigned a very high probability to the committee cutting its target by 0.25 percentage point (25 basis points) from its current range of 4.25 percent to 4.50 percent at its September 16–17 meeting. This morning, as the following figure shows, investors raised the probability they assign to a 50 basis point reduction at the September meeting from 0 percent to 14.2 percent. Investors are also now assigning a 78.4 percent probability to the committee cutting its target range by at least an additional 25 basis points at its October 28–29 meeting.

PCE Inflation Is Steady, but Still Above the Fed’s Target

On August 29, the Bureau of Economic Analysis (BEA) released data for July on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2017, with inflation measured as the percentage change in the PCE from the same month in the previous year. In July, headline PCE inflation was 2.6 percent, unchanged from June. Core PCE inflation in July was 2.9 percent, up slightly from 2.8 percent in June. Headline PCE inflation and core PCE inflation were both equal to what economists surveyed had forecast.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, headline PCE inflation fell from 3.5 percent in June to 2.4 percent in July. Core PCE inflation increased slightly from 3.2 percent in June to 3.3 percent in July. So, both 1-month PCE inflation estimates are above the Fed’s 2 percent target, with 1-month core PCE inflation being well above target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure), so we shouldn’t attempt to draw wider conclusions from one month’s data. In addition, these data may reflect higher prices resulting from the tariff increases the Trump administration has implemented. Once the one-time price increases from tariffs have worked through the economy, inflation may decline. It’s not clear, however, how long that may take and it’s likely that not all the effects of the tariff increases on the price level are reflected in this month’s data.

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

Headline market-based PCE inflation was 2.3 percent in July, unchanged from June. Core market-based PCE inflation was 2.6 percent in July, also unchanged from June. 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 declined sharply to 1.1 percent in July from 4.1 percent in June. One-month core market-based inflation also declined sharply to 2.1 percent in July from 3.8 percent in June. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate. Still, looking at 1-month inflation gives us a better look at current trends in inflation, which these data indicate is slowing significantly.

As we noted earlier, some of the increase in inflation is likely attributable to the effects of tariffs. The effect of tariffs are typically seen in goods prices, rather than in service prices because tariffs are levied primarily on imports of goods. As the following figure shows, one-month inflation in goods prices jumped in June to 4.8 percent, but then declined sharply to –1.6 in July. One-month inflation in services prices increased from 2.9 percent in June to 4.3 percent in July. Clearly, the 1-month inflation data—particularly for goods—are quite volatile.

Finally, these data had little effect on the expectations of investors trading federal funds rate futures. Investors assign an 86.4 percent probability to the Federal Open Market Committee (FOMC) cutting its target for the federal funds rate at its meeting on September 16–17 by 0.25 percentage point (25 basis points) from its current range of 4.25 percent to 4.5o percent. There has been some speculation in the business press that the FOMC might cut its target by 50 basis points at that meeting, but with inflation remaining above target, investors don’t foresee a larger cut in the target range happening.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Weaker Than Expected Jobs Report Shakes Up Investors’ Expectations of FOMC Rate Cuts

This morning (August 1), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for July. The data in the report show that the labor market was weaker than expected in July. There have been many stories in the media about firms becoming cautious in hiring as a result of the Trump administration’s tariff increases. Some large firms—including Microsoft, Walt Disney, Walmart, and Proctor and Gamble—have announced layoffs. In addition, real GDP growth slowed during the first half of the year. Nevertheless, until today it appeared that employment growth remained strong.

According to the establishment survey, there was a net increase of only 73,000 nonfarm jobs during July. This increase was below the increase of 1115,000 that economists surveyed by Factset had forecast. In addition, the BLS revised downward its previous estimates of employment in May and June by a combined 258,000 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 figure shows the striking deceleration in job growth during the second quarter of this year.

The unemployment rate increased from 4.1 percent in June to 4.2 percent in July, which is the same rate as economists surveyed had forecast. As the following figure shows, the unemployment rate has been remarkably stable over the past year, staying between 4.0 percent and 4.2 percent in each month since May 2024. In June, the members of the Federal Open Market Committee (FOMC) forecast that the unemployment rate for 2025 would average 4.5 percent. The unemployment rate would have to rise significantly in the second half of the year for that forecast to be accurate.

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 111,573 net new jobs each month to keep the unemployment rate stable at 4.2 percent. If this estimate is accurate, continuing monthly net job increases of 73,000 would result in a slowly 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 net change in jobs from the establishment survey. As measured by the household survey, there was a net decrease of 260,000 jobs in July, following an increase of 93,000 jobs in June. 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 with employment increasing in one survey while falling in the other, which was the case this month. (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 July the ratio declined to 80.4 percent from 80.7 percent in June. 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 November 2019. Further declines in the prime-age employment-population ratio would be a strong indication of a softening labor market.

It is still unclear how many federal workers have been laid off since the Trump Administration took office. The establishment survey shows a decline in federal government employment of 12,000 in June and a total decline of 84,000 since the beginning of February 2025. However, the BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.” It’s possible that as more federal employees end their period of receiving severance pay, future jobs reports may report a larger decline in federal employment. To this point, the decline in federal employment has been too small to have a significant effect on the overall labor market.

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 3.9 percent in July, up from an increase of 3.8 percent in June.

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 July, the 1-month rate of wage inflation was 4.0 percent, up from 3.0 percent in June. If the July rate of wage inflation is sustained, it would complicate the Fed’s task of achieving its 2 percent target rate of price inflation. 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 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.) Yesterday, as we noted in a blog post, investors assigned a 60.8 percent probability to the committee keeping its target unchanged at 4.25 percent to 4.50 percent at its September 16–17 meeting. As the following figure shows, there has been a sharp change in investors’ expectations. As of this morning, investors are assigning a 78.9 percent probability to the committee cutting its target by 0.25 percentage point (25 basis points) to a range of 4.00 percent to 4.25 percent.

There is a similarly dramatic change in investors’ expectations of the target range for the federal funds rate following the FOMC’s October 28–29 meeting. As the following figure shows, investors now assign a probability of 57.3 percent to the committee lowering its target range to 3.75 percent to 4.00 percent at that meeting. Yesterday, investors assigned a probability of only 13.7 percent to that outcome.

The FOMC Leaves Its Target for the Federal Funds Rate Unchanged; Two B of G Members Dissent

Photo of President Trump and Fed Chair Powell from Reuters via the Wall Street Journal

Today’s meeting of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) occurred against a backdrop of President Trump pressuring the committee to reduce its target for the federal funds rate and two members of the Board of Governors signalling that they were likely to dissent if the committee voted to hold its target constant.

Last week President Trump made an unusual visit to the Fed’s headquarters in Washington, DC to discuss what he had said was the Fed’s excessive spending on renovating three buildings. As we discuss in this blog post, the Supreme Court is unlikely to allow a president to remove a Fed chair because of disagreements over monetary policy. A president would likely be allowed to remove a Fed chair “for cause.” Some members of the Trump administration have argued that excessive spending on renovating buildings might be sufficient cause for the president to remove Fed Chair Jerome Powell. President Trump has indicated that, in fact, he doesn’t intend to replace Powell before his term as chair ends in May 2026, but President Trump still urged Powell to make substantial cuts in the federal funds rate target.

As most observers had expected, the committee decided today to keep its target range for the federal funds rate unchanged at 4.25 percent to 4.50 percent. Board of Governors members Michelle Bowman and Christopher Waller dissented, preferring “to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.” It was the first time since 1993 that two members of the Board of Governors have voted against an FOMC decision.

In his press conference following the meeting, Chair Powell indicated that a majority of the committee believed that: “Inflation is above target, maximum employment is at target, so policy should be slightly restrictive.” Policy is restrictive in the sense that the current range for the federal funds rate is higher than the long-run equilibrium rate. Powell noted that: “There are many uncertainties left to resolve. There is much more to come looking ahead.” Jn particular, with respect to the effect of tariffs, he stated that it’s “still quite early days …. [We’ve] seen substantial increases in tariff revenue collections … [but we] have to see how much of tariffs are passed through to consumers. A long way to go to know what has happened.”

One reason that President Trump has urged the FOMC to lower its target for the federal funds rate is that lower interest rates will reduce the amount the federal government has to pay on the $25 trillion in U.S. Treasury debt owned by private investors. At his press conference, Chair Powell was asked whether the committee discussed interest payments on the national debt during its deliberations. He responded that the committee considers only the dual mandate of price stability and maximum employment given to the Fed by Congress. Therefore, “We don’t consider the fiscal needs of the federal government.”

The FOMC’s next meeting is on September 16–17. Powell noted that before that meeting, the committee will have seen two more employment reports and two more inflation reports. The data in those reports may clarify the state of the economy. There has been a general expectation that the committee would cut its target for the federal funds rate at that meting

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.) The data from the futures market indicate that one month ago investors assigned a 75.4 percent probability to the committee cutting its target range by 0.25 percentage point (25 basis points) to 4.00 percent to 4.25 percent at the September meeting. Today, however, sentiment has changed, perhaps because investors now believe that inflation in coming months will be higher than they had previously expected. As the following figure shows, investors now assign a 55.0 percent probability to the committee leaving its target for the federal funds rate unchanged at that meeting and only a 45 percent probability of the committee cutting its target range by 25 basis points.