Thus, Goolsbee has “put concerns about the job market aside”. His focus is on inflation.

As President of the Chicago District, Goolsbee is reacting to the observations and concerns of his Midwest constituents across Iowa, Illinois, Indiana, Michigan, and Wisconsin. He cited concerns about costs and affordability. However, the January Beige Book entry for Chicago did not describe any notable levels of concern as follows:

“Prices rose moderately on balance in late November and December and contacts expected a similar pace of growth over the next 12 months. Producer prices rose moderately. Nonlabor input costs rose moderately, with contacts highlighting higher costs for energy (particularly electricity) and raw materials. Manufacturing contacts continued to attribute some increases in raw materials prices to tariffs, while a few construction contacts reported little effect of tariffs on their operating costs. Consumer prices rose moderately, and one retail industry analyst said that to date about half of tariff-related cost increases had been passed through to consumers.”

These “moderate” observations from January are almost identical to the descriptions from the November Beige Book.

The Fed’s contacts in the Chicago district appear to support Goolsbee’s lack of concern for the labor market. They expect a slight increase in employment in the next 12 months. So far, gains in hospitality employment have compensated for further contraction in manufacturing employment. Employers are focused on replacing retirees and citing overall sufficient worker availability. In the CNBC interview, Goolsbee pointed squarely at the uncertainty driven by government policies as the source of employment weakness. The Fed cannot address this kind of uncertainty with lower interest rates; monetary policy acts in an economically cyclical way

The Fed is unable to address non-cyclical issues. Goolsbee suggests as much when he points out that “low hiring and slow firing is not what the business cycle looks like”. Instead, a business cycle features high layoffs along with low hiring.

Goolsbee’s observations and assessments clearly plant him firmly against rate cuts for the foreseeable future.

Conclusion

Goolsbee sounds about as entrenched in his position as are the most dovish members of the Fed who believe rate cuts are necessary to support the labor market. Thus, the stage remains set for growing acrimony as monetary policy moves cautiously ahead of the arrival of a new Fed Chair who presumably will be under orders to get rates much lower as a condition for the nomination. The jobs picture as outlined by Goolsbee will make such a dovish push quite difficult to explain.

So while it seems unlikely the Fed will deliver the surprise rate cut this January, I think the overall trajectory of a dovish bias for the Fed keeps expectations solid for an economy running on the hot side with policy combined with a surplus of fiscal stimulus. Thus, I continue to like the commodities portion of my shopping list for 2026.

The post The Fed’s Labor Market Divide Is Hardening Against Rate Cuts appeared first on Inflation Watch.

“How long are we going to keep saying this is the worst of it?”

So much for peak inflation. The Consumer Price Index (CPI) once again came in hotter than “expectations” for both headline and core inflation. The U.S. Bureau of Labor Statistics reported annual June CPI at 9.1%, an increase over May’s 8.6%. Core inflation, excluding food and energy, came in at 5.9%, slightly lower than May’s 6.0%. The monthly increase of 0.7% was slightly higher than the 0.6% of the previous 2 months. The report called the increase in prices “broad based” and “…almost all major component indexes increased over the month.”

Despite being wrong for the last several months, the peak inflation narrative finally has a chance to come through with the next report on inflation. The prices of a large swath of commodities have plunged in recent weeks as it appears the Fed’s aggressive hawkishness is finally breaking the back of inflationary pressures. Financial markets have reflected these declines with large losses for commodity-related stocks. These declines continued today even in the face of the hot inflation print.

However, even if inflation’s momentum abates, prices promise to remain elevated for quite some time. Companies are warning in their earnings reports about this very prospect. For example, PepsiCo, Inc. (PEP) reported yesterday the following observation and expectation on inflation (from the Seeking Alpha transcript of the earnings call):

“Balance of the year inflation is higher than it is for the first half of the year. I think we’ve mentioned in the past, we’re in the teens in terms of commodity inflation. That will continue, but a little bit higher in the back half.”

Company reports are typically more meaningful than the expectations of economists because companies have money on the line and profits at stake.

Ultimately, what matters most is how the Federal Reserve responds to the latest numbers. If the Fed stays the course, inflation’s momentum should take another step down. (Notably, Brian Deese acknowledged on CNBC that core inflation remains too high and outlined the myriad of inflation-fighting initiatives underway by the administration). If the Fed gives in to pressures to slow down and also communicates its belief that its job is near an end, I fully expect a massive rally in financial markets and asset prices…at least in the short-term. If the Bank of Canada’s large (and surprise) 1 percentage point increase in its interest rate is any indication today, the Fed will stay on message.

Be careful out there!

The post So Much For Peak Inflation appeared first on Inflation Watch.

The lure of the “peak inflation” narrative has been strong since the report on March inflation. The appeal is natural because of the sense that over time all economic conditions revert to the mean (or the average). However, the rush to declare the end of today’s problem with inflation has been particularly meaningful because it occurs in the middle of a desperate, global desire to return to some form of the “normalcy” we (think) we enjoyed before the pandemic. To their credit, various Federal Reserve members tried to soft pedal the idea of peak inflation, including the San Francisco President back in late April. They have remained nearly uniform in their stated resolve to focus on fighting inflation. The path from 8.6% to anything close to the Fed’s comfort zone does not start with hoping for a peak in inflation.

That 8.6% is where the headline Consumer Price Index (CPI) hit in May. Inflation hurtled March’s 8.5% for a new high for this inflationary cycle. The “peak inflation” crowd might now think surely inflation cannot go any higher from here. Perhaps this hope works out this time, but it matters little in the face of persistent and elevated inflation. Moreover, on the same Fast Money episode featuring Eison’s commentary, Lindsey Piegza, chief economist at Stifel, made an excellent point about the lagging nature of the CPI. Piegza pointed out that the worst impacts of the Russian invasion of Ukraine and the COVID lockdowns in China have yet to hit the CPI. If so, CPI may not continue to increase, but inflation will remain high for quite some time.

The broad-based nature of the May CPI increases suggests that inflation will indeed remain far above the Fed’s comfort zone for quite some time. Both the month-over-month and, of course, year-over-year inflation numbers were elevated across major categories (numbers are monthly and then year-over-year):

• Food: 1.0% and 8.6%
• Energy: 3.9% and 34.6%
• All items less food and energy: 0.6% and 6.0%
• New vehicles: 1.0% and 12.6%
• Used cars: 1.8% and 16.0%
• Shelter: 0.6% and 5.5%

The persistent rise in shelter costs is particularly notable given the Fed’s sudden sense of urgency on normalizing monetary policy implicitly came from housing costs.

I see at least one lesson from these numbers: inflation will not peak until it peaks. In other words, there is little point in straining the eyes over the horizon seeking the end of this inflationary cycle. Whatever the specific numbers, inflation here in the U.S. and across many nations promises to be persistent and elevated and will frustrate the economic agent who try to act against it without causing other economic fallout.

Be careful out there!

The post Persistently Elevated, Unactionable Inflation appeared first on Inflation Watch.