Median PCE inflation – HubbardOBrienEconomics.com Blog

New BEA Releases Show Steady Inflation and Higher Output Growth

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The Bureau of Economic Analysis (BEA) released two reports this morning (August 26): “GDP (Second Estimate) and Corporate Profits, 2nd Quarter 2026” and “Personal Income and Outlays, July 2026.” The BEA’s second estimate is that real GDP grew at annual rate of 1.5 percent in second quarter of 2026, which is unchanged from the BEA’s initial estimate released last month and is equal to the forecast of economists surveyed by the Wall Street Journal.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, Federal Reserve policymakers often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased at an annual rate of 4.2 percent in the second quarter, up from 3.9 percent in last month’s initial estimate. The growth rate in real final sales to domestic purchasers was more than twice the rate of growth of real GDP, as well as far above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. So growth in real final sales to domestic purchasers indicates that the U.S. economy is expanding rapidly, as opposed to the much weaker growth shown by real GDP data. Typically, growth in real final sales to domestic purchasers is steadier than growth in real GDP and is likely a better indicator of the underlying growth rate in the economy.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. As we noted in a recent blog post, Fed Chair Kevin Warsh indicated in his press conference following the July meeting of the Federal Open Market Committee (FOMC) that the committee intended to continue using the PCE price index as its gauge of inflation, although that decision would be revisited early next year. Warsh may have intended this statement to reassure financial markets that there would be continuity in the Fed’s measure of inflation. However, some investors appear to have interpreted Warsh’s statement that the decision would be revisited next year as an indication that he favored moving to a measure that would show lower rates of inflation than those shown by the PCE.

In other words, some investors believe that in the future the FOMC might be willing to accept higher levels of PCE inflation. Perhaps in response to this interpretation, the yield on the 30-year U.S. Treasury bond increased in the days following Warsh’s press conference. Higher expected inflation can lead to lower bond prices and higher bond yields. (We discuss this point in Money, Banking, and the Financial System, Chapter 5, which is now available in a new edition.) Warsh is scheduled to speak on Friday at the Kansas City Fed’s annual Jackson Hole Economic Policy Symposium. His speech will cover his views on the current state of the economy and may give clues as to the future monetary policy actions he may support.

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The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In July, headline PCE inflation was 3.7 percent, unchanged from June. Core PCE inflation in July was 3.3 percent, also unchanged from June. Headline PCE inflation was slightly higher than forecast by economists surveyed by the Wall Street Journal, while core PCE was equal to the forecast. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation increased from –1.3 in June to 1.9 percent in July. Core PCE inflation increased from 1.8 percent in June to 3.0 percent in July. Headline inflation was very low in June—prices actually fell during the month—largely because of falling gasoline prices. Today’s data show here was a noticeable acceleration in inflation during July. Of course, it’s important not to overinterpret the data from a single month.

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

Headline market-based PCE inflation was 3.5 percent in July, unchanged from June. Core market-based PCE inflation was 3.0 percent in July, also unchanged from June. So, both market-based measures show inflation in July remaining well above the Fed’s 2 percent target.

Fed Chair Kevin Warsh argued in testimony at his confirmation hearing before the Senate that the Fed should stop relying on headline PCE inflation: “The measures [of inflation] I prefer are looking at things that are called trimmed averages. We take out all of the tail-risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy.”

Trimmed-mean PCE inflation drops the 31 percent of goods and services with the highest inflation rates and the 24 percent of goods and services with the lowest inflation rates. A closely related measure, median PCE inflation, is calculated by listing the inflation rate in each individual good or service included in the PCE and identifying the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates.

The following figure shows headline PCE inflation the (red line), core PCE inflation (the brown line) and trimmed-mean PCE inflation (the blue line). Trimmed-mean PCE inflation in July was 2.3 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In July, median PCE inflation was 2.7 percent, which was unchanged from June. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data releases appear to have had little effect on the views of investors who buy and sell federal funds futures contracts. These investors believe that the FOMC will likely not raise its target for the federal funds rate at its meeting on September 15–16 as some analysts have speculated. The probability that the committee will leave its target range unchanged at 3.50 percent to 3.75 percent declined only slightly from 60.4 percent yesterday to 59.9 percent this afternoon. Investors assign a probability of 54.7 percent to the FOMC raising its target range by o.25 percentage points (25 basis points) at its meeting on October 27–28.

New BEA Releases Show Slower Growth Than Expected and Lower Inflation

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The Bureau of Economic Analysis (BEA) released two reports this morning (July 30): “GDP (Advance Estimate), 2nd Quarter 2026” and “Personal Income and Outlays, June 2026.” The BEA’s initial—or advance—estimate is that real GDP grew in the second quarter of 2026 at annual rate of 1.5 percent, down from an annual rate of 2.1 percent in the first quarter. Economists surveyed by the Wall Street Journal had forecast that real GDP would grow at a rate of 1.8 percent in the second quarter. The following figure shows the BEA’s estimated rates of real GDP growth in each quarter beginning with the first quarter of 2022.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including former Fed Chair Jerome Powell—often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased at an annual rate of 3.9 percent in the second quarter, more than twice the rate of growth of real GDP, as well as far above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. So growth in real final sales to domestic purchasers indicates that the U.S. economy is expanding rapidly, as opposed to the much weaker growth shown by real GDP data. Typically, growth in real final sales to domestic purchasers is steadier than growth in real GDP and is likely a better indicator of the underlying growth rate in the economy.

There has been much discussion in the media of the surge in spending on new data centers to power artificial intelligence programs. This surge is reflected in following figure, which shows real domestic investment in information processing equipment. This category of investment spending has increased more than 40 percent since the fourth quarter of 2024.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. As we noted in a blog post yesterday, Fed Chair Kevin Warsh indicated in his press conference following the meeting of the Federal Open Market Committee (FOMC) that the committee intended to continue using the PCE price index as its gauge of inflation, although that decision would be revisited early next year. Warsh may have intended this statement to reassure financial markets that there would be continuity in the Fed’s measure of inflation. However, some investors appear to have interpreted Warsh’s statement that the decision would be revisited next year as an indication that he favored moving to a measure that would show lower rates of inflation than those shown by the PCE.

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In June, headline PCE inflation was 3.7 percent, down from 4.1 percent in May. Core PCE inflation in June was 3.3 percent, down slightly from 3.4 percent in May. Headline and core PCE inflation were both equal to the forecasts of economists surveyed by the Wall Street Journal. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows monthly PCE inflation and monthly core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation declined from 5.7 percent in May to –1.3 percent in June; in other words, consumer prices fell in June. Core PCE inflation fell from 4.1 in May to 1.6 percent in June. Even leaving aside the effect of falling gasoline prices on headline PCE, these data show that in June there was a noticeable deceleration in inflation. Of course, it’s important not to overinterpret the data from a single month.

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

Headline market-based PCE inflation was 3.5 percent in May, down from 4.0 percent in May. Core market-based PCE inflation was 3.0 percent in June, down from 3.2 percent in May. So, both market-based measures, although lower than the full PCE measures, show inflation in June remaining well above the Fed’s 2 percent target.

The following figure shows headline PCE inflation the (blue line), core PCE inflation (the red line) and trimmed-mean PCE inflation (the brown line). Trimmed-mean PCE inflation in June was 2.2 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In June, median PCE inflation was 2.7 percent, also below both headline and core inflation. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data releases appear to have reinforced the view of investors who buy and sell federal funds futures contracts that the FOMC will raise its target for the federal funds rate by o.25 at its meeting on September 15–16. That probability increased from 58.3 percent yesterday to 65.4 percent this afternoon.

New BEA Releases Show Faster Growth and Higher Inflation

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The Bureau of Economic Analysis (BEA) released two reports this morning (June 25): “GDP (Third Estimate), Industries, Corporate Profits, State GDP, and State Personal Income, 1st Quarter 2026” and “Personal Income and Outlays, May 2026.” The BEA revised upward its estimate of real GDP growth in the first quarter of 2026 from an annual rate of 1.6 percent to an annual rate of 2.1 percent. Economists surveyed by LSEG had expected that the BEA would leave its estimate of real GDP growth in the first quarter unchanged. The following figure shows the BEA’s estimated rates of real GDP growth in each quarter beginning with the first quarter of 2022.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including former Fed Chair Jerome Powell—often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased at an annual rate of 1.7 percent in the first quarter, below the 2.1 percent rate of increase in real GDP and close to the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. Note also that real final sales to private domestic purchasers grew by 2.9 percent in the third quarter of 2025, during which real GDP grew by 4.4 percent, and by 1.9 percent in the first quarter of 2025, when real GDP declined by 0.6 percent. So this measure of output is more stable, and likely is a better indicator of the underlying growth rate in the economy, than is the growth rate of real GDP.

The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In May, headline PCE inflation was 4.1 percent, up from 3.8 percent in April, and the highest rate since April 2023. Core PCE inflation in May was 3.4 percent, up slightly from 3.3 percent in April. Headline PCE inflation was equal to the forecasts of economists surveyed by FactSet, while core PCE inflation was slightly higher. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows monthly PCE inflation and monthly core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation increased from 5.0 percent in April to 5.5 percent in May. Core PCE inflation rose from 3.0 in April to 3.9 percent in May. Even leaving aside the effect of rising gasoline prices on headline PCE, these data show that in May both core and headline PCE inflation were well above the Fed’s target.

Headline market-based PCE inflation was 3.9 percent in May, up from 3.7 percent in April. Core market-based PCE inflation was 3.2 percent in May, up slightly from 3.1 percent in April. So, both market-based measures, although lower than the full PCE measures, show inflation in May remaining well above the Fed’s 2 percent target.

New Fed Chair Kevin Warsh argued in testimony before the Senate that the Fed should stop relying on headline PCE inflation: “The measures [of inflation] I prefer are looking at things that are called trimmed averages. We take out all of the tail-risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy.”

The following figure shows headline PCE inflation the (blue line), core PCE inflation (the red line) and trimmed-mean PCE inflation (the brown line). Trimmed-mean PCE inflation in May was 2.4 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In May, median PCE inflation was 2.8 percent, also below both headline and core inflation. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation still running well above the Fed’s 2 percent annual inflation target.

Today’s macro data have had little effect on investors who buy and sell federal funds futures contracts. These investors still expect that the Federal Open Market Committee (FOMC) will leave its target for the federal funds rate unchanged at its meeting on July 28–29 but will raise the target by 0.25 percentage point at its September 15–16 meeting.

New BEA Releases Show Slower Growth and High Inflation

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The Bureau of Economic Analysis (BEA) released two reports this morning (May 28): “GDP (Second Estimate) and Corporate Profits, 1st Quarter 2026” and “Personal Income and Outlays, April 2026.” The BEA revised downward its estimate of real GDP growth in the first quarter of 2026 from an annual rate of 2.0 percent to an annual rate of 1.6 percent. Economists surveyed by the Wall Street Journal had expected that the BEA would leave its estimate of real GDP growth in the first quarter unchanged. The following figure shows the BEA’s estimated rates of GDP growth in each quarter beginning with the first quarter of 2022.

The following figure—taken from the BEA report—shows the contributions of each component of spending to the BEA’s downward revision of its estimate of GDP growth. The growth of both consumption spending and investment spending, which are the largest component of GDP, were revised downward. The downward revision in consumption spending reflects lower spending on services and the downward revision in investment spending reflects lower business spending on inventories.

As we’ve discussed in previous blog posts, to better gauge the state of the economy, policymakers—including former Fed Chair Jerome Powell—often prefer to strip out the effects of imports, inventory investment, and government expenditures—which can be volatile—by looking at real final sales to private domestic purchasers, which includes only spending by U.S. households and firms on domestic production. As the following figure shows, real final sales to domestic purchasers increased at an annual rate of 2.4 percent in the first quarter, which was well above the 1.6 percent rate of increase in real GDP and also above the U.S. economy’s expected long-run annual real growth rate of 1.8 percent. Note also that real final sales to private domestic purchasers grew by 2.9 percent in the third quarter of 2025, during which real GDP grew by 4.4 percent, and by 1.9 percent in the first quarter of 2025, when real GDP declined by 0.6 percent. So this measure of output is more stable and likely is a better indicator of the underlying growth rate in the economy than is the growth rate of real GDP.

The BEA’s “Personal Income and Outlays” report this morning included monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2019, with inflation measured as the percentage change in the PCE from the same month in the previous year. In April, headline PCE inflation was 3.8 percent, up from 3.5 percent in March. Core PCE inflation in April was 3.3 percent, up slightly from 3.2 percent in March. Headline PCE inflation was slightly below and core PCE inflation was equal to the forecasts of economists surveyed by FactSet. Both headline PCE inflation and core PCE inflation remain well above the Fed’s 2 percent annual inflation target.

The following figure shows monthly PCE inflation and monthly core PCE inflation calculated by compounding the current month’s rate over an entire year. (Often referred to as 1-month inflation.) Measured this way, headline PCE inflation fell from the very high rate of 8.9 percent in March to a still high rate of 4.9 percent in April. Core PCE inflation declined from 3.6 in March to 2.9 percent in April. Even leaving aside the effect of rising gasoline prices on headline PCE, these data show that in March both core and headline PCE inflation were well above the Fed’s target.

Headline market-based PCE inflation was 3.7 percent in April, up from 3.4 percent in March. Core market-based PCE inflation was 3.1 percent in April, unchanged from March. So, both market-based measures, although lower than the full PCE measures, show inflation in April remaining well above the Fed’s 2 percent target.

The following figure shows headline PCE inflation the (blue line), core PCE inflation (the brown line) and trimmed-mean PCE inflation (the red line). Trimmed-mean PCE inflation in April was 2.4 percent, well below both headline and core PCE inflation.

The following figure from the web site of the Federal Reserve Bank of Cleveland shows headline PCE inflation (the green line), core PCE inflation (the blue line), and median PCE inflation (the brown line). In April, median PCE inflation was 2.8 percent, also below both headline and core inflation. So Warsh has a point that these two measures of inflation, which are less affected by particularly high or low rates of inflation in some goods and services, indicate that inflation has been running below the Fed’s currently preferred measure. But these measures also show inflation running well above the Fed’s 2 percent annual inflation target.

Today’s macro data have had little effect on investors who buy and sell federal funds futures contracts. For some time, investors have seen little likelihood that the Fed’s policymaking Federal Open Market Committee would cut its target for the federal funds rate until sometime next year. These investors see it as far more likely that the committee will raise its target by the end of the year than that it will cut it.

New PCE Data Show Inflation Slowing

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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.