WASHINGTON, DC – As investors, business leaders, and policymakers consider America’s economic outlook, two things should be front of mind. First, the US economy is very strong. And, second, President Donald Trump’s populist policies pose one of the biggest risks to its continued growth.
In January, core consumer-price-index (CPI) inflation (excluding food and energy prices) rose by 0.4% month on month – more than economists had expected, and double December’s increase, pushing the year-on-year rate to 3.3%.
Financial markets took note. But it has been clear for months that the Federal Reserve is not succeeding in pushing inflation toward its 2% target. Underlying inflation has been stuck since the spring of 2024. Using the personal consumption expenditures price index (excluding food and energy prices), year-on-year inflation was either 2.7% or 2.8% in seven of the last eight months. (It was 2.6% in June.) And 12-month core CPI inflation has been either 3.2% or 3.3% in each of the last eight months.
Meanwhile, the labor market is holding steady. The headline monthly unemployment rate has remained between 4% and 4.2% since May, and has been falling for the past two months. In fact, the labor market may be tightening. A broader measure that accounts for involuntary part-time schedules and marginal labor-force attachment implies that slack in the labor market may have been falling since July.
An inflation rate stuck above the Fed’s target and a strong labor market reflect robust economic fundamentals. Monthly employment gains have been strong and layoffs remain low, supporting household incomes and the consumer spending that has fueled the economy’s expansion. Economic output grew above its underlying potential in the second half of 2024. At the time of writing, the Federal Reserve Bank of Atlanta estimates that the economy is on track to grow 2.3% in the current quarter, arguably above its sustainable rate.
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