A closer look at inflation in services excluding energy, this accounts for about 60% of the CPI and 75% of the core CPI.
Over the last three months up at a 4.6% annual rate compared to 2.9% annual rate pre-pandemic.
That excess is adding ~1.2pp to annualized core CPI.
Overall core services are still below trend--but is moving up more quickly so converging towards/above trend. You could look at that and say that our only inflation problem is goods. Or you could look at that and say we have another shoe yet to drop.
Leading candidate for yet-to-drop shoe #1 is housing prices. These are still up relatively slowly for *all* housing as compared to the large increases we're seeing for new leases. All should catch up to new.
Potential yet-to-drop shoe #2: pandemic-related prices. We're still in a pandemic. It has been constraining services demand and service prices. If we return to more normal then expect higher prices for airfare, hotels, events, etc.
Potential yet-to-drop shoe #3: there is some evidence from @jimstockmetrics and Mark Watson that service prices are more sensitive to labor market slack than overall prices. And labor markets much tighter now than they were a year ago. nber.org/papers/w25987
But who knows. I expect an undoing of the abnormal rotation to reduce inflation the question is how much--is it enough to get us to 2%? Does it leave us at 3%? And if it leaves us at 3% is the Fed OK with that (as I think they should be) or do they feel they need to fight it?
BTW, here is the same multiple period picture for durable goods that I showed you for core services.
And repeating the durable goods vs. services comparison over the last 24 months that started this discussion in the first place.
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Core PCE inflation came in above the Fed's target for the 4th straight month. But it moderated from Q1 and the elevation was entirely due to imputed portfolio fees resulting from the strong stock market.
About one-sixth of the PCE is imputed items, one notable one is portfolio fees which are treated as rising in price when the value of assets rise. Statistically market-based core PCE works better.
Average hourly earnings growth has been drifting down recently. Was strong for much of 2023 but negative three months in a row--zero for the last 6 months (I use a 6 month line instead of my usual 3 due to high volatility).
Overall +0.7% since pre-COVID.
Same story if you exclude generally higher-paid managers and focus on production and non-supervisory workers--also zero over the last six months but in this case is much stronger over the full period, up 2.8% since pre-COVID.
No matter how you look at it average hourly workers for all private sector workers are below trend. They're up at a 0.2% annual rate since pre-COVID, were growing much faster before then.
A lot of that is higher-paid workers not doing as well...
The CPI-based Ecumenical Underlying Inflation measure was 3.5% in April, up from 3.3% in February and 3.4% in March. Although it is normalized to be equivalent to the PCE has been running (unusually) ~50bp higher than PCE.
Is the median of 7 measures over 3, 6 and 12 months.
It includes the official BLS measures plus median and trimmed mean.
Note, core, median and trimmed mean have been running about the same, suggesting it is not special factors elevating inflation--except leaving over the possibility of one giant special factor in all three, shelter, which has lags.
I won't make you wait for the full set of numbers. All of them slowed a bit from previous months.
A certain amount has been made about how it's *all* shelter. That is true over 12 months, core CPI ex shelter up 2.1%. But over the last six months is a 2.9% annual rate so that more reassuring number has a lot of lagged data in it.
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.