Headline CPI was 0.5% for December, core was 0.6%. Cars were a big part of the number (again) but inflation continues to broaden--the "other" excluding cars and pandemic services is high for the third month in a row.
Inflation is still almost entirely driven by durable goods not services. Durable goods inflation should come down as supply chains unsnarl but what will happen to services is the big question--is drifting up a little bit lately.
One reason to expect services to rise more is that they include shelter--which includes rent and owner's equivalent rent. The CPI is showing a much smaller increase than other measures. They're not comparable but measures of new leases show the future for all leases.
The US-Euro area gap widened a bit in December as well. Looking over twenty-four months on a comparable basis US is 2pp higher. Slightly less comparable but comparing core Euro area to core US ex shelter shows an even larger gap.
Finally this looks at core CPI over different time periods. 24 months avoids base effects (which are relatively small now), 12 months is the headline number, and 3 months is what is happening lately.
In terms of where we're going, this report doesn't do much to clarify--the same exact debates from the last several months are still applicable (including is it temporary supply chain and durables or will it shift to services.
My views on what people got wrong last year and what could happen this year in this (long) thread.
Slowing inflation this year is the most likely scenario, most experts expect it to slow to around 2% in the second half, I would take the over on that.
Pretty much a goldilocks job report. 175K jobs is respectable at any time and in the context of strong prior months so a ~250K monthly average even more so.
Unemployment ticked up to 3.9%.
Earnings growth slowed.
Most reassuring data for the Fed in the last 2+ weeks.
The unemployment rate has been below 4.0% for more than two years now. A very slight upward drift.
At the same time the prime age employment rate is rising again and remains above pre-COVID. This had not been the pattern for the last few recessions.
Productivity growth came in at a 0.3% annual rate in Q1. It is very volatile so here are annualized growth rates in rough order of meaningfullness:
Since 2019-Q4: 1.5%
Last two years: 1.2%
Last year: 2.9%
Last quarter: 0.3%
Overall productivity is about 1% below CBO's pre-pandemic forecast.
(The fact that output is a little above CBO's pre-pandemic forecast is because labor, particularly through immigration, has come in higher than expected.)
Europe is way below trend and falling. Very different from the picture above.
Job openings and quits both fell in March as a wide range of labor market indicators are consistent with a cooling economy--and a labor market that, broadly, is like where it was in 2019--with lower quits but higher openings (with a question of whether openings were trending up).
The number of job openings per unemployed worker fell from 1.4 last month to 1.3 this month--both well below its peak of 2.0 in March 2022. This is still above pre-COVID but, again, it might have been on an upward trend.
These are a variety of indicators of labor market tightness, all normalized to the same standard deviation and a mean of zero pre-COVID. They're all roughly around pre-COVID.
The 1.6pp forecasting error two months ahead is larger than all but one forecasting error from when these forecast data start (in 2007) and COVID. And the previous similar-sized (but opposite sign) error was 2008-Q4.
There were a number of people dismissive of the March CPI miss as "only 0.1pp". But looking back over the last few month there have been serial misses.
And annual rates are what matters. 2.1% is mission accomplished but 3.7% is a flashing red warning.
GDP growth came in a bit below expectations at a 1.6% annual rate in the first quarter.
But much of the slowdown was in non-inertial items like inventories (-0.35pp) and net exports (-0.86pp). The better signal of final sales to private domestic purchasers was 3.1%.
Consumer spending was strong, up at a 2.5% annual rate. Business fixed investment was a touch on the weak side, up at a 2.9% annual rate with business structures down. But residential investment was very strong, 13.9% annual rate.
Overall GDP remains above CBO's pre-pandemic forecast although GDI was below it (most recent GDI data is Q4). Likely the economy overall is at/above forecast because labor force above forecast--while productivity a touch below it.
If the Fed cuts rates by Sep or possibly even this yr, it's much more likely because they get bad news about the employment side of their mandate than because they get reassuring news about the inflation side.
The reason: even if inflation falls will take time to be convincing.
A bit of math helps. Suppose core PCE is 0.3% in March & 0.157% each month after (consistent with 1.9% annual rate). The 6-month / 12-month annualized rates would be:
In this scenario inflation is completely vanquished starting in April. But when they see monthly numbers they worry they're volatile so they look over 6 or 12 months.
And the 6/12 month data they have at the July meeting will show 3.0%/2.4%.