Name: On Inflation, Labor and Political Pressure | CME Group's Market Signals
Uploaded: 2026-02-02T16:46:00Z
Duration: 5 min 19 s
Description: We'll parse through the latest employment and core PCE Price Index and what they suggest for inflation.

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We'll parse through the latest employment and core PCE Price Index and what they suggest for inflation.

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On Inflation, Labor and Political Pressure | CME Group's Market Signals

Thank you and welcome to the first episode of CME Group's Market Signals for 2026. Erik, it's so great to see you again after a long break.

Yes, well thank you so much for having me back.

Well, Erik, today is all about the Federal Reserve, the FOMC also meeting for the first time in 2026. The Committee is grappling with the cooling labor market and inflation still above 2%. However, recent employment data suggests almost no movement in the labor market. What do you make of that?

Well, I think you're right. There really is almost no movement. And so there's both good and bad aspects to this. The good aspect to it, when you look at the initial claims data, the continuing jobless claims data, it suggests that layoffs are at a historic low. So there's not a lot of mass layoffs going on in the economy, which is great news. The less good news is when you look at the non-farm payroll survey or the unemployment rate, it suggests there's also very, very little hiring going on, and we certainly see a lot of anecdotal evidence that recent college graduates are really struggling to land that first position.

What does the labor market imply about inflation?

Well, that's a good question. So the fact that there's not mass layoffs would suggest that there could still be some upward pressure on prices. On the other hand, the fact that, you know, there's also not a lot of hiring going on means you could see some softness in wage data in certain professions, which in theory should also help to lower inflation.

So speaking of inflation, the Core PCE price index from fall of last year came out belatedly last week and showed only mildly elevated price increases towards the end of the year. What's your take on those data and how do they compare with Core CPI data?

So we've seen a really unusual divergence between the two indices. On the positive side, we've seen a tremendous drop in inflation according to the Core CPI, which is a more widely followed of the two indices, but also a much narrower index. It's showing that core inflation has come down from 3% down to 2.6%, which is pretty good news. On the other hand, the Core PCE, which is a much broader and more comprehensive measure of inflation that the Federal Reserve generally prefers, shows inflation's actually quite sticky, still at 2.8%, stuck where it has been for a long time and still about 8/10 of 1% above the Federal Reserve's target of 2%.

So what does it mean for where inflation is headed?

Well, that's a really good question. I think it really depends on a whole bunch of different prices. But when you look at the divergence between the two indices, the main thing that we're seeing is that housing costs continue to come down, which is good news. Rental increases are going much more slowly than they had been a few years ago. That's helping to bring down Core CPI. It's a very, very large share of CPI. It's a much smaller component of Core PCE. However, we are seeing a lot of upward pressure in prices in healthcare, which is a much larger component of Core PCE.

And that's something that we expect will definitely trend higher this year with those policy changes coming in.

And it's a possibility we'll have to look at the data to see what actually happens.

So in addition to the labor market and inflation, if those weren't enough, there has been a lot of concern about the potential erosion of Central Bank independence. What could be the consequences of that?

Well, you know, I think you see that concern expressed most clearly into precious metals markets. Since the beginning of 2025, for a whole variety of reasons, including the fact that many central banks are cutting interest rates despite the fact that inflation is running above target in nearly every country. We've seen gold prices rise 86% since the beginning of last year. Silver prices up close to 240%. These are really, really big moves. What's also very curious is this concern does not seem to be shared by the bond market where US Treasury yields have been stable with the longest term yields around, you know, 30 year yields still just below 5%, not really increasing much, and the break even inflation spread between treasury inflation protected securities and standard US treasuries stuck at 2.38%. So it's really curious to me that you have these two markets seeming to have such different views and it suggests to me they both cannot simultaneously be right, either the precious metals markets are correct in fearing inflation, in which case perhaps we'll see a rise in long-term bond yields or perhaps the bond markets are right, that inflation won't be such a problem and precious metals prices might correct.

Well, Erik, we will have to leave it there. I know we will find out soon enough, and that's a lot more, and there'll be a lot more to talk about in the next CME Group Market Signals.