At long last, a piece of US government data! The “core” consumer price index (CPI)–excluding food and energy–came in at a 0.2% month-over-month increase last Friday, one tick below market forecast and lower than the increases in the prior two months.
That’s great in isolation and supports the Federal Reserve’s(Fed) case for further interest rate cuts. But nothing is ever in isolation. The Fed doesn’t decide policy on the basis of inflation alone, it follows its “dual mandate” of maximum employment and low and stable inflation. The CPI release says little about unemployment and nothing about which side of the Fed’s “dual mandate” is weighing more heavily. That’s the crux for monetary policy: when unemployment has been edging up and inflation remains above the Fed’s target – like it is now.
In a recent piece about the data void created by the federal government shutdown, we introduced our “attentiveness” indicators, which measure the media’s focus on inflation and unemployment. Let’s look at them again to see if attention is tilting toward inflation unemployment. This can tell us something about which side of the dual mandate the Fed may be weighing more heavily.
Figure 1 plots the attentiveness indicators for inflation (orange) and unemployment (blue). Since October 17, attention to unemployment has drifted lower. And while the federal government skipped releasing the early October labor reports, state agencies have been publishing weekly unemployment insurance claims data throughout the shutdown, and those readings haven’t trended higher. If anything, they seem to be falling a little. This is probably one reason why attention to unemployment has drifted downwards.
Figure 1 Unemployment vs. Inflation: Which Dominates the News?
Attention to inflation had been falling, but it rose again following the release of the CPI report. We attribute that partly to the fact that there was finally a data point to discuss, and partly to the downside surprise versus expectations. All the same, attention to inflation remains pretty high in a historical context. Media coverage still reflects the view among many market participants that a 2% target is a 2% target, and that there has been no sustained progress toward that target over the past year.
Figure 2 shows the same data in a scatter plot, letting us see inflation and unemployment attentiveness in combination and how that compares historically. Currently, the inflation indicator has come down quite a bit, but remains high relative to its historical range, excluding the peaks during and after the Great Inflation of 2022-2023. The unemployment indicator has also eased and, while slightly on the high side of long-term norms, is not as stubbornly high as the inflation indicator.
Figure 2. Unemployment and Inflation Attentiveness in Historical Context
And that brings us to the Fed decision due this Wednesday. The Fed had already primed investors for another rate cut in September via its Summary of Economic Projections (the “dot plot”), and last week’s CPI ratified the market’s expectation. Looking beyond this week’s meeting, however, the current backdrop suggests less attention to unemployment and persistently high attention to inflation. After all, core CPI is 0.5% higher than when the Fed started cutting rates in September 2024 (3.0% vs. 2.5%), while the unemployment rate is unchanged at 4.3%. Meanwhile, the fed funds rate is already 1.25% below where it was then, and about to be another 0.25% lower. We’ll be watching how this week’s FOMC communications filter through to our attentiveness indicators. Building on our earlier analysis of the shutdown data void, these attention measures remain a practical, real-time lens into which side of the dual mandate is likely to dominate policy in the weeks ahead.
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