Month: September 2025

The six month lag for Friday’s Core PCE report came in at 2.5% for August, down from 3.0% the previous month. The probability that centered 1 year inflation rose over the previous 6 months also fell to 21%. The 3 and 12 month figures were higher at 2.9%.

While 3 and 12 lagged inflation is far worse at predicting one year centered inflation than the 6 month lagged inflation, we need to be wary of data artifacts, in this case the unusually high price report from February 2025. We can guard against misinterpretation by bracketing our preferred measure with 5 and 7 month lagged inflation, which have nearly the same predictive power as 6 month inflation. Those 2 figures came in at 2.8% and 2.9%, respectively. Bottom line, the story is similar to last month, implying stable inflation of around 2.9%.

The 3, 6, and 12 month annualized percentage changes show similar core PCE inflation: they are pegged at 3.0%, 3.0%, and 2.9% respectively. Inflation is stable, albeit at a higher level than the Fed’s long run 2.0% target.
Economic historian and macroeconomist Brad DeLong has long argued that the 2.0% inflation target is too low. I tend to agree: we’ve come uncomfortably close to deflation three times over the past 30 years, which is three times too many. By my reckoning, we are at an inflation sweet spot and should tighten if inflation creeps upwards and loosen if it trends too far downwards. But the Fed’s official goals differ and they are properly concerned about their credibility with price setters. Even if the 2.0% target isn’t the best we could do, it’s the one that the economy has shaped itself around.
The market believes that the Fed will lower the Fed Funds target rate by a quarter percentage point after the September 16-17 meeting and that this week’s job report will be an important input into their reasoning. I interpret last Friday’s PCE inflation report as being relatively tame.