July 2025 – Six Month Lag

The six month annualized lag indicates that core PCE inflation crossed the 3 percent threshold, moving from 2.9% to 3.2%. The headline one year percentage change, which measures inflation centered on December 2024, increased from 2.7% to 2.8%.

The probability that one year centered inflation in June 2025 will be higher than centered inflation in December 2024 has risen to 78%. That is by no means a sure thing, but it’s fair to say that inflation is probably increasing.

The next Fed rate setting meeting is scheduled for September 16-17. There will be another PCE report available by then, as well as an additional CPI report. According to the CME group, fed fund futures imply a 39% chance of a rate cut in September. That seems a little high to me, though not unreasonable.

The one year percentage change for May’s core PCE report came in at 2.7%, which gives an idea of 1 year inflation centered on November 2024. The best forecast of inflation centered on May 2025 is the annualized six month percentage change, which was a slightly higher 2.9%. The probability that centered inflation has rose over the past 6 months is at 69%.

Inflation is somewhat elevated and probably increasing. The Fed Funds is at 4.3%: subtracting out 2.9% gives an estimated real rate of 1.4%. Since January 2000 that figure averaged at *negative* 0.1%, but during the 1990s it averaged + 3.9%. So the fed funds rate is little high for this century, but not anywhere near as tight as it was during the 1990s.

Six Month Lag

Month: July 2025

Core PCE report for June implies inflation above 3.0%

Core PCE inflation report for May 2025: trending upwards

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