Monetary Policy Report submitted to the Congress on July 10, 2026, pursuant to section 2B of the Federal Reserve Act
Domestic Developments
Inflation trended up last year and moved notably higher in recent months
After having fluctuated around a rate somewhat above the Federal Open Market Committee’s (FOMC) 2 percent target in 2024 and early 2025, measures of consumer price inflation moved up steadily over the remainder of last year amid signs that increases in tariffs on U.S. goods imports had pushed up domestic prices for some consumer goods. Measured inflation then stepped up further in March as energy prices surged after the start of the Middle East conflict. Over the 12 months ending in May, the price index for personal consumption expenditures (PCE) rose 4.1 percent, up substantially from a 2.5 percent pace a year earlier (figure 1). Core price inflation—which excludes food and energy items and historically has been a better gauge of future inflation—was 3.4 percent over the 12 months ending in May, up from a 2.8 percent pace a year earlier. By contrast, some other measures of inflation that attempt to reduce the influence of idiosyncratic price movements have moved lower over the past year. For example, the 12-month change in the trimmed mean measure of PCE prices constructed by the Federal Reserve Bank of Dallas declined from 2.6 percent last May to 2.4 percent this May.2
Figure 1. Personal consumption expenditures price indexes
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Note: The horizontal line indicates the Federal Open Market Committee’s objective of 2 percent inflation.
Consumer energy prices have risen sharply since February, while food prices continued to increase moderately
PCE energy prices leaped 24 percent over the 12 months ending in May (figure 2, left panel). Much of the gain reflects a jump in oil and gasoline prices following the start of the military conflict in the Middle East, which severely constrained shipping through the Strait of Hormuz—a key passageway for oil—and damaged some of the region’s energy infrastructure. As a consequence, oil prices rose sharply and have been volatile since then, fluctuating on news regarding negotiations between the U.S. and Iran (figure 3).
Figure 2. Price indexes for subcomponents of personal consumption expenditures
Note: Percent change is from year earlier.
Figure 3. Oil prices
Note: The data are weekly averages of daily data and extend through July 2, 2026.
Although the pace of increase in PCE food prices remained moderate, it has picked up this year. Food prices rose 2.4 percent over the 12 months ending in May, up from 1.8 percent at the same time last year (figure 2, left panel). A few somewhat interrelated factors contributing to the step-up in measured food price inflation include the effects of higher tariffs and increases in agricultural and livestock commodity prices (figure 4, blue line).
Figure 4. Spot prices for commodities
Lower-income households are particularly sensitive to changes in the costs of food and energy, as these necessities account for a large share of their expenditures. Reflecting the sharp run-ups seen in 2021 and 2022, as well as the increase this year, food prices are almost 30 percent higher than before the pandemic, well above the 8 percent increase that would have been observed if these prices had continued rising at their average rates over the decade before the pandemic.3
Core goods price inflation continued to move up early this year
In assessing the outlook for inflation, it is helpful to consider three separate components of core prices: core goods, housing services, and core nonhousing services (figure 2, right panel). Core goods price inflation moved up notably over 2025 and continued to rise in the early months of this year. The 12-month change in PCE core goods prices stood at 2.4 percent in May, far higher than the 0.6 percent pace recorded a year earlier.
The effects of tariffs cannot be observed directly in the official consumer price statistics, and these effects depend on the responses of consumers, firms, importers, and foreign exporters. Nonetheless, the pattern of price changes last year suggests that tariff increases contributed in part to the upturn in consumer goods price increases. As an example, relative to their pre-tariff trends, average monthly price increases were higher in goods categories that are more exposed to tariff increases due to their relatively high import content, such as household appliances and a variety of consumer electronics.
In the early months of 2026, rapid gains in consumer prices for software and accessories, computers, and other electronics also contributed to overall measured core goods inflation.4 These prices are quite elevated relative to their year-earlier levels, and the gains likely reflect the surge in demand for semiconductors and other components important to the buildout of data centers that provide the infrastructure needed for artificial intelligence (AI) applications and services. Although a large portion of high-tech goods are imported, most of these products are exempt from tariffs, so changes in tariff rates are not an important factor in their prices.
Rising prices for fuel, metals, and other key inputs have increased cost pressures on domestic manufacturers and are likely feeding into core goods prices. This year, purchasing managers have reported in both the Institute for Supply Management manufacturing survey and regional Federal Reserve surveys that the prices they paid for inputs used in production moved higher (figure 5). Many respondents cited geopolitical tensions in the Middle East, rising fuel and transportation costs, and broad supply constraints as primary drivers of these elevated input costs. Indeed, global benchmark prices for industrial metals have risen considerably, on net, this year, likely reflecting supply constraints resulting from the conflict in the Middle East and increased demand arising from data center construction and outfitting (figure 4, black line). Finally, the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index—which incorporates information from a range of sources—indicates that supply chain pressures have jumped in recent months.
Figure 5. Prices paid indexes from manufacturing surveys
Note: The data extend through June 2026. The regional survey average comprises data from the Dallas Fed’s Texas Manufacturing Outlook Survey, the Kansas City Fed’s Survey of Tenth District Manufacturers, the New York Fed’s Empire State Manufacturing Survey, and the Philadelphia Fed’s Manufacturing <a s Supreme Court ruling that invalidated many prevailing tariff measures and whose repeal was only partially offset by new, alternative tariff measures.
Figure 6. Nonfuel import price index
Note: The missing value for the nonfuel import price index in October 2025 is estimated using the average of the September 2025 and November 2025 values.
Housing services price inflation moved lower
Housing services price inflation declined considerably last year and is now close to its pre-pandemic pace. Over the 12 months ending in May, housing services prices rose 3.2 percent, a notably smaller gain than the 4.1 percent increase for the comparable period in 2025 (figure 7).
Figure 7. Measures of rental price inflation
Note: The data start in January 2016 for Zillow and January 2018 for Apartment List. PCE is personal consumption expenditures. Apartment List, Zillow, and Cotality data measure market-rate rents—that is, rents for a new lease by a new tenant.
Core nonhousing services price inflation remains above its pre-pandemic average
Finally, prices for core nonhousing services—a broad group that includes medical, travel and dining, and financial services—increased 3.9 percent over the 12 months ending in May, somewhat above the range of readings this measure has recorded since the middle of last year. Robust increases in prices for medical services, accommodations, and airfares (likely due to a recent surge in jet fuel prices) have contributed to the gains in this category. Despite the recent uptick in the pace of price increases, there do not appear to be persistent cost pressures for firms in this sector, where labor is the most important input: Wage growth has declined gradually in recent years, and even though it remains at a solid level, it has been accompanied by strong productivity growth.
Most measures of longer-term inflation expectations have been stable, while most measures of shorter-term expectations have risen in recent months
A generally held view among <a Employment and Earnings across Demographic Groups" provides further details.) Layoffs have been subdued, and job vacancies have been roughly flat on net. Meanwhile, job growth has picked up so far this year, although it remains soft by historical standards: Following very anemic average monthly gains of about 30,000 in the second half of last year, private payroll gains increased to nearly 80,000 in the first quarter of this year and then stepped up further to almost 100,000 in the second quarter (figure 12). Across industries, while employment growth in health care has been relatively strong, other industries have posted more modest gains, with employment in leisure and hospitality, information, and financial activities recording declines.
Figure 10. Civilian unemployment rate
Note: The data extend through June 2026. Missing data for October 2025 are estimated using the average of the September 2025 and November 2025 values.
Figure 11. Unemployment rate, by race and ethnicity
Note: All data shown are 3-month moving averages and extend through June 2026. Unemployment rate measures total unemployed as a percentage of the labor force. Persons whose ethnicity is identified as Hispanic or Latino may be of any race. Small sample sizes preclude reliable estimates for Native <a investments in labor-saving technologies and high-tech capital to improve efficiency as well as the elevated pace of business formation since 2020. More recently, businesses' adoption of AI technologies could also be a contributing factor, albeit modest to date.
Figure 16. Average U.S. labor productivity growth
Note: The data are output per hour in the business sector.
A task force will explore productivity and jobs
One of the recently announced independent task forces will explore the subject of productivity and jobs. It will survey the pace, the reach, and the economic effects of generative AI—a new general-purpose technology—and other innovations. The task force will explore the implications for the Federal Reserve in pursuit of its maximum-employment and price-stability mandates.
Wage growth remains solid and, with persistently strong productivity growth, is roughly consistent with 2 percent inflation over time
Measures of nominal wage growth remain solid, although they have edged down this year on net. Total hourly compensation for private-sector workers, as measured by the employment cost index, increased 3.4 percent over the year ending in March, unchanged from its pace a year earlier but well below its peak increase of 5.5 percent in mid-2022 (figure 17). However, other measures of labor compensation growth, such as average hourly earnings (a less comprehensive measure of compensation) and the Federal Reserve Bank of Atlanta’s Wage Growth Tracker (which reports the median 12-month wage growth of individuals responding to the Current Population Survey), have moved lower over the past year.
Figure 17. Measures of change in hourly compensation
Note: For the Atlanta Fed’s Wage Growth Tracker, the data are shown as a 3-month moving average of the 12-month percent change; for private-sector average hourly earnings, the data are 12-month percent changes and extend through June 2026; for the private-sector employment cost index, change is over the 12 months ending in the last month of each quarter.
Although wage growth remains a touch above its pre-pandemic pace, persistently strong labor productivity growth suggests that current nominal wage growth is roughly consistent with 2 percent inflation over time.
Solid nominal wage gains have nonetheless been outpaced by overall price inflation over the past year. With the recent jump in energy prices boosting the change in PCE prices to 4.1 percent over the 12 months ending in May, the purchasing power of workers’ wages, in the aggregate, declined somewhat over this period. That said, for the year ending in May 2025, wage gains outpaced price inflation. The effects on individual households, though, depend in part on workers’ circumstances—because nominal wage changes vary significantly across industry and occupation and because households consume different baskets of goods than the one represented in the aggregate PCE price index. (For details on how real wage gains have differed across demographic groups, see the box “Employment and Earnings across Demographic Groups.”)
Box 1. Employment and Earnings across Demographic Groups
Employment disparities across sex, race, ethnicity, and education groups—some of which reached record lows in 2023 and early 2024 in an especially tight labor market—continue to be relatively narrow compared with historical levels. However, despite the labor market progress for many demographic groups in recent years, significant disparities in absolute levels across groups remain. Additionally, the robust real wage gains experienced by some historically disadvantaged groups in recent years have since moderated as labor market tightness has eased and consumer price inflation has remained elevated.
Among prime-age people (aged 25 to 54), the employment-to-population (EPOP) ratio for Black or African American workers softened considerably in the first half of 2025 but has since partially recovered and, in recent months, has been a touch above its average level in 2019 (figure A, left panel).1 This development primarily reflects an increase in the unemployment rate for this group over early 2025 that has since partially reversed.2 At the same time, the employment rate for white workers has continued to gradually drift higher over the past year. As a result, the EPOP ratio gap between Black and white individuals has widened, on net, over the past year, although it remains narrow compared with its historical level.3 By contrast, the employment rate for Hispanic or Latino workers has held roughly steady, on net, over the past year, while the employment rate for Asian workers has edged down a touch, although the ratios for both groups are elevated by historical standards. The EPOP ratio gap between Hispanic and white workers is roughly unchanged relative to a year ago, while the gap between Asian and white workers has widened.4
Figure A. Prime-age employment-to-population ratios compared with the 2019 average ratio, by group
Note: The data are 3-month moving averages. The data by race and ethnicity extend through June 2026. Prime age is 25 to 54. All series are seasonally adjusted by Federal Reserve Board staff. Data by sex and education before January 2026 are estimated by Federal Reserve Board staff to eliminate discontinuities in the published history. Missing data for October 2025 are estimated using the average of the September 2025 and November 2025 values.
The EPOP ratio for prime-age women grew strongly during the post-pandemic recovery and peaked in 2024, which led to a historically narrow EPOP ratio gap between prime-age men and women. This increase in the EPOP ratio for women mostly reflects the continuation of the pre-pandemic trend of rising female labor force participation—some of which is likely attributable to increased educational attainment—among other factors.5 In the past year, growth in the female EPOP ratio has leveled off, but given that the male EPOP ratio has been roughly flat over this time, the employment gap between men and women has remained near its low point. Both women with and without some college education currently have EPOP ratios a bit above their pre-pandemic levels (figure A, right panel). By contrast, male EPOP ratios are about equal to their pre-pandemic levels for both these education groups.
Among all prime-age people (aged 25 to 54), the EPOP ratio has remained roughly stable over the past year (figure B). The EPOP ratio for people aged 55 or older, though, has continued to gradually decline and is now approximately 3.5 percentage points below its 2019 average. Most of this shortfall relative to 2019 reflects retirements related to the aging of the baby-boom generation. As this cohort has grown older, the median age of people in the aged 55 or older population has risen, and because older workers are more likely to have retired, this trend has lowered the group’s EPOP ratio. Further, workers in this group, particularly those aged 65 or older, began retiring somewhat earlier than usual during the pandemic, which has put some additional downward pressure on their EPOP ratio.6 After falling a fair bit from its post-pandemic peak in 2024, the EPOP ratio of younger workers (aged 16 to 24) has remained flat, on net, over the past year, and now sits a touch below its average level in 2019. The net decline relative to 2024 likely reflects a combination of factors particular to this age group: greater sensitivity of labor force participation decisions to the easing labor market conditions of the past two years, potential vulnerability to the adoption of generative artificial intelligence (GenAI) across employers, and potential negative effects of remote-work policies on early-career workers.7
Figure B. Employment-to-population ratios compared with the 2019 average ratio, by age
Note: The data are 3-month moving averages and extend through June 2026. All series are seasonally adjusted by Federal Reserve Board staff. Data before January 2026 are estimated by Federal Reserve Board staff to eliminate discontinuities in the published history. Missing data for October 2025 are estimated using the average of the September 2025 and November 2025 values.
Although employment disparities across many demographic groups remain near the historical lows reached during the post-pandemic recovery period, substantial gender, racial, ethnic, and geographic gaps in levels persist. Currently, prime-age women are employed at a rate 11 percentage points less than men, while prime-age Black and Hispanic workers are employed at a rate 6 percentage points and 3 percentage points below white workers, respectively, underscoring long-standing structural factors.8
Real wage growth has cooled a bit further in the past year as consumer price inflation has stepped up. Earlier in the current expansion, the tight labor market led to robust real wage growth, particularly for lower-wage workers and for many historically disadvantaged groups; however, since mid-2024, wage growth for these groups has slowed. As shown in the top-left panel of figure C, real wage growth—as measured by the Federal Reserve Bank of Atlanta’s Wage Growth Tracker and deflated by the personal consumption expenditures price index—was generally stronger for workers in the bottom half of the income distribution during the post-pandemic recovery through the first half of 2024. This strength was driven by both labor demand outpacing labor supply in lower-wage industries during the post-pandemic reopening of the economy and strong wage growth for job switchers over the same period who were disproportionately lower-wage workers.9 However, since late 2024, real wage growth for workers in the bottom quartile has fallen below that of the other quartiles but has remained positive, on average, over the past 12 months. Real wage growth among the highest income quartile remained robust through mid-2025 but has since slowed sharply. (The data used in this discussion to measure real wage growth across demographic groups are a 12-month moving average and are therefore lagged relative to actual real wage growth.10 As a result, the group-specific real wage growth measures discussed here remain positive even while the aggregate real wage growth measures discussed elsewhere in this report have turned negative.)
Figure C. Median real wage growth, by group
Note: Series show 12-month moving averages of the median percent change in the hourly wage of individuals observed 12 months apart, deflated by the 12-month moving average of the 12-month percent change in the personal consumption expenditures price index. In the top-left panel, workers are assigned to wage quartiles based on the average of their wage reports in both Current Population Survey outgoing rotation group interviews; workers in the lowest 25 percent of the average wage distribution are assigned to the 1st quartile, and those in the top 25 percent are assigned to the 4th quartile.
The recent cooling in real wage growth is visible across all broad demographic groups, including among some groups for whom, up until a year ago, wage growth had remained robust. Wage growth for nonwhite workers had been a bit stronger than for white workers from 2022 through mid-2024 but has been similar to white workers’ since then (figure C, top-right panel). Similarly, wage growth for workers with a high school diploma or less was strong relative to other groups in the post-pandemic tight labor market; however, as labor market conditions softened in 2024, wage growth for this group fell below that for college-educated workers in early 2024 and has been slowing, on net, since mid-2024 (figure C, bottom-left panel). Some of this softening may be spreading to workers with an associate’s degree, for whom real wage growth has eased more significantly in the past year and currently stands below that for other education groups. Finally, wages for men and women largely grew in tandem until the middle of 2024, but real wage growth for women was a bit stronger than that for men from mid-2024 through mid-2025 (figure C, bottom-right panel). However, in recent months, wage growth for women has tapered a bit and is now a touch below that of men.
1. Because of the government shutdown in 2025, the Bureau of Labor Statistics did not collect October employment and wage data. Therefore, October 2025 employment and nominal wage values are estimated as the average of September 2025 and November 2025 values.
The missed collection of employment data for October 2025 may complicate the comparison of employment and labor force participation rates across demographic groups because of the varying effect across groups of a form of survey sampling error referred to as “excess rotation group” bias. For a discussion of this possible bias, see Hie Joo Ahn and James D. Hamilton (2022), “Measuring Labor-Force Participation and the Incidence and Duration of Unemployment,” Review of Economic Dynamics, vol. 44 (April), pp. 1–32. Return to text
2. The EPOP ratio—that is, employment divided by population—can also be expressed as LFPR * (1 – UR), where LFPR is the labor force participation rate and UR is the unemployment rate. The EPOP ratio therefore decreases as the LFPR decreases or as the unemployment rate increases. The EPOP ratio is multiplied by 100 for presentation purposes in the figures. Return to text
