The CPI-based Ecumenical Underlying Inflation measure came in at 2.5% in June.

This is the median of 21 different measures (7 concepts over 3, 6 and 12 months)--all remeaned to match the PCE targeted by the Fed. Note that core ex shelter is also below the Fed's 2% target on a 3, 6 and 12 month basis (a few other measures also below on the more volatile 3 month basis).

If you look at core PCE ex housing will still likely be above the 2% target. Plus the Fed includes housing.

Amazing inflation data for June!!!

A big slowdown in shelter growth meant that core was up only 0.1% (0.8% annual rate). That + transitory gasoline decline drove headline down 0.1% (0.7% annual rate).

Over the last 3 / 6 /12 months core has been:

1.1% / 3.3% / 3.3% No matter how you look at it inflation was basically non-existent during the month of June. Here are the full set of numbers.

The economy added 206K jobs in June, continuing at about the same pace it has all year.

The unemployment rate rose by 0.1pp but at the same time participation rose 0.1pp so the employment rate was unchanged.

Hourly earnings up 0.3%. The nerve wracking part of recent data is that the unemployment rate has been very slowly rising for a year now. The 4.1% by itself is perfectly fine, in fact low by historical standards. But whenever urate has risen a little it has risen a lot and tipping us into recession.

Job openings per unemployed worker remained at 1.2 for the second month in a row in May. That is what they were just prior to COVID. All five of the measures of labor market tightness I pay the most attention to are very close to their pre-COVID values (at most 0.7 standard deviations away).

PCE inflation came in even lower than you would have expected from the CPI/PPI earlier this month. Core PCE was up 0.08% and overall PCE actually fell 0.01%.

Core at an annual rate:

1 month: 1.0%
3 months: 2.7%
6 months: 3.2%
12 months: 2.6% Here are all the numbers I'll be discussing in this thread.

Some say the best way to achieve fiscal sustainability is through more growth rather than raising taxes or cutting spending. And while higher growth would be welcome for this (and many other reasons), the arithmetic on it making much of a difference is very challenging.

A 🧵. The heart of the arithmetic issue is this equation which describes the evolution of the debt. It says that debt/GDP goes up to the extent that:

(1) Interest rates exceed growth rates (with the effect larger when debt/GDP is higher)

(2) The government runs primary deficits.

Finally a pleasant surprise. Core CPI was 0.16% in May (2.0% annual rate). Headline was 0.01%. These are the best monthly readings since 8/21 & 7/22 respectively.

Good news but caution: just 1 print & some fluky items.

Core annual rate for 1/3/6/12 months:

2.0/3.3/3.7/3.4 I normally show headline last because it is not particularly predictive of anything. But that seemingly missing bar for May (really it's a zero) is too good not to share.

The payroll survey shows 2.7m jobs added over the last year including 272K added last month.

The household survey shows 0.4m jobs added over the last year including 408K lost last month.

Why? And what does it mean? 1. WHY? not obvious. Conceptually the surveys are different (e.g., household includes self employed, payroll includes multiple jobs). But if you use the BLS adjusted household survey to match employment concept you get 0.2m jobs added in last year & 444K in May.

A big 272K jobs added but the unemployment rate rises to 4.0% and labor force participation falls. This is an economy that continues to be strong (249K average jobs over the last three months). But also one where the labor market has been steadily cooling as urate steadily rises. Here is the unemployment rate.

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.

Annual rates:
1 month: 3.0%
3 months: 3.5%
6 months: 3.2%
12 months: 2.8% 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.

Annual rates:
1 month: 2.1%
3 months: 2.9%
6 months: 2.7%
12 months: 2.5%

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.

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.

Forecasters got this month exactly right. Monthly core CPI inflation rate eased off a little from the last few months but still high.

Annual rates:

1 month: 3.6%
3 months: 4.1%
6 months: 4.0%
12 months: 3.6% I won't make you wait for the full set of numbers. All of them slowed a bit from previous months.

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.

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.)

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.

The Feb core PCE forecast for 2024-Q1 was 2.1%, or "mission accomplished." The actual was 3.7%, a red warning sign.

Full history from Survey of Professional Forecasters forecasts/actual for 2024-Q1:

Feb-23: 2.5%
May-23: 2.5%
Aug-23: 2.6%
Nov-23: 2.7%
Feb-24: 2.1%
Actual: 3.7% 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.

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.

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:

April: 2.9% / 2.6%
May: 3.0% / 2.5%
June: 3.0% / 2.4%
July: 2.4% / 2.5%
Aug: 2.2% / 2.5%
Sep: 1.9% / 2.4%

My story for what has happened to inflation and what it means going forward.

TL;DR: Underlying inflation fell from 4.0-4.5% to 2.5-3.0% as labor markets loosened (through openings down not unemployment up). Last mile will be much harder than to date.

A shortish 🧵 Let me state at the outset, this is a story. Other stories that fit the data too. I'm not sure about this. And even if I had the model right, there are still unexpected shocks.

Plus no story fits the very high frequency data which has lots of noise & measurement error.

Core CPI coming in very hot for the third month in the row. The numbers are not kind to the thesis that January was a seasonal anomaly.

12 months: 3.5%
6 months: 3.2%
3 months: 4.6%
1 month: 4.6% The bottom-up forecasts of inflation coming down were premised on much larger reductions in shelter growth than we've seen. It has, as widely expected, come down from its 9% annual rate high but plateaued around 5.5% ar.