Tag: Trimmed-mean CPI inflation

CPI Inflation Increases in September

Image created by ChatGPT

After the Federal Open Market Committee (FOMC) increased its target for the federal funds rate at its September meeting, there was uncertainty as to whether it would raise its target again at its meeting on October 27–28. Today’s report from the Bureau of Labor Statistics (BLS) on the consumer price index (CPI) for September showed that inflation had risen more than expected, likely increase somewhat the probability of the committee raising its target range at its October meeting.

As we’ve noted before, and as we discuss in Macroeconomics, Chapter 15 (Economics, Chapter 25), monetary policy affects the economy with, in the words of Nobel laureate Milton Friedman, “long and variable lags.” As a result, most economists agree that the Federal Reserve should not attempt to “fine tune” the economy by responding to each government release of macroeconomic data. Nevertheless, in practice, it’s clear that during times when Fed policymakers are split over what course of action to take, a single data report can have a significant effect on their decision.

The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).

  • The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 3.7 percent in September, up from 3.4 percent in August.
  • The core inflation rate, which excludes the prices of food and energy, was 2.6 percent in September, up from 2.4 percent in August.

Headline inflation and core inflation were both higher than the forecasts of economics surveyed by the Wall Street Journal. (Note that because of last year’s federal government shutdown, inflation data for October 2025 are not available.)

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) soared to 8.1 percent in September, up from 4.9 percent in August. Core inflation (the red line) was 4.1 percent in September, up from 3.5 percent in August.

As the large gap between the headline and core 1-month inflation rates indicates, energy prices, particularly gasoline prices, rose sharply in September. In the following figure, the red line shows the 12-month inflation rate in all energy prices included in the CPI. Inflation in energy prices was 20.4 percent in September, up from 16.4 percent in August. The blue line shows the 12-month inflation rate in gasoline prices, which increased to 34.2 percent in September from 27.4 percent in August.

There has been a fear that the rise in energy prices that began in March will pass through to increases in food prices, which are a key concern for many consumers. The following figure shows 12-month inflation in the CPI category “food at home” (the blue bar)—primarily food purchased at grocery stores—and in the category “food away from home” (the red bar)—primarily food purchased at restaurants. Grocery prices increased 3.5 percent in September from a year ago, down from 3.7 percent in August. Restaurant prices increased 3.5 percent from a year ago, up slightly from 3.4 percent in August. To this point, increases in energy prices seem to have had some effect on grocery prices and restaurant prices, although the extent of the effect is unclear.

Fed Chair Kevin Warsh has indicated that he favors measures of the inflation rate that exclude particularly small or particularly large changes in the prices of some goods or services—so-called outliers. Median CPI, which is compiled monthly by economists at the Federal Reserve Bank of Cleveland, is calculated by ranking the price changes of every good or service in the index from the largest price change to the smallest price change, and then choosing the price change in the middle. The idea is to eliminate the effect on measured inflation of any short-lived events that cause the prices of some goods and services to be particularly high or particularly low. Economists at the Cleveland Fed have conducted research that shows that, in their words, “the median CPI provides a better signal of the underlying inflation trend than either the all-items CPI or the CPI excluding food and energy. The median CPI is even better at forecasting [personal consumption expenditures] PCE inflation in the near and longer term than the core PCE price index.”

Trimmed-mean inflation, also compiled by economists at the Cleveland Fed, excludes the highest 8 percent of price changes and the lowest 8 percent. The following figure shows 12-month trimmed mean (the blue line) and median (the red line) CPI inflation. Trimmed-mean inflation was 2.7 percent in September, up from 2.6 percent in August. Median inflation was 2.6 percent in September, unchanged from August. So these measures of inflation are both lower than the conventional headline and core CPI inflation measures, which indicates that the acceleration in inflation during September was not affecting all sectors of the economy.

Note that the Fed uses the 12-month change in the personal consumption expenditures (PCE) price index, not the change in the CPI, when gauging whether it is hitting its 2 percent annual inflation target. Historically, PCE inflation has been about 0.4 percentage points to 0.5 percentage points lower than CPI inflation. The Bureau of Economic Analysis (BEA) won’t release its estimate of September PCE inflation until October 29, one day after the next FOMC meeting.

Today’s report showing that inflation remains persistently above the Fed’s 2 percent annual target has likely raised the chance that Federal Reserve policymakers will increase their target range for the federal funds rate from the current 3.75 percent to 4.00 percent by o.25 percentage points (or 25 basis points) at the next meeting of the FOMC on October 27–28. Trading in the federal funds futures market this afternoon indicates that investors assign a 33.8 percent probability to the FOMC raising its target range at that meeting, which is up from a 22.1 percent probability yesterday. Trading indicated that investors assign a 89.7 percent probability to the committee increasing its target range by at least 25 basis points at its last meeting of the year on December 8–9. Some analysts have speculated that the committee will postpone its next rate increase until December to avoid raising the rate before the midterm election on November 3.

CPI Inflation Comes in Slightly Below Expectations, Increasing Likelihood of Fed Rate Cuts

Fed Chair Jerome Powell (left) and Vice Chair Philip Jefferson (photo from federalreserve.gov)

Today (August 12), the Bureau of Labor Statistics (BLS) released its report on the consumer price index (CPI) for July. The following figure compares headline CPI inflation (the blue line) and core CPI inflation (the red line).

  • The headline inflation rate, which is measured by the percentage change in the CPI from the same month in the previous year, was 2.7 percent in July, unchanged from June. 
  • The core inflation rate, which excludes the prices of food and energy, was 3.0 percent in July, up slightly from 2.9 percent in June. (Note that there was some inconsistency in how the core inflation rate is reported. The BLS, and some news outlets, give the value as 3.1 percent. The unrounded value is 3.0486 percent.)

Headline inflation and core inflation were slightly lower than what economists surveyed had expected.

In the following figure, we look at the 1-month inflation rate for headline and core inflation—that is the annual inflation rate calculated by compounding the current month’s rate over an entire year. Calculated as the 1-month inflation rate, headline inflation (the blue line) declined from 3.5 percent in June to 2.4 percent in July. Core inflation (the red line) increased from 2.8 percent in June to 3.9 percent in July.

The 1-month and 12-month inflation rates are telling somewhat different stories, with 12-month inflation indicating that inflation is stable, although moderately above the Fed’s 2 percent inflation target. The 1-month core inflation rate indicates that inflation may have increased during July. 

Of course, it’s important not to overinterpret the data from a single month. The figure shows that the 1-month inflation rate is particularly volatile. Also note that the Fed uses the personal consumption expenditures (PCE) price index, rather than the CPI, to evaluate whether it is hitting its 2 percent annual inflation target.

A key reason for core inflation being significantly higher than headline inflation is that gasoline prices declined by 23.1 percent at an annual rate in June. As shown in the following figure, 1-month inflation in gasoline prices moves erratically—which is the main reason that gasoline prices aren’t included in core inflation.

Does the increase in inflation represent the effects of the increases in tariffs that the Trump administration announced on April 2? (Note that many of the tariff increases announced on April 2 have since been reduced) The following figure shows 12-month inflation in three categories of products whose prices are thought to be particularly vulnerable to the effects of tariffs: apparel (the blue line), toys (the red line), and motor vehicles (the green line). To make recent changes clearer, we look only at the months since January 2021. In July, prices of apparel fell, while the prices of toys and motor vehicles rose by less than 1.0 percent.

The following figure shows 1-month inflation in these prices of these products. In July, motor vehicles prices and apparel prices increased by less than 1 percent, while toy prices increased by 1.9 percent after having soared soared by 24.3 percent in June. At least for these three products, it’s difficult to see tariffs as having had a significant effect on inflation in July.

To better estimate the underlying trend in inflation, some economists look at median inflation and trimmed mean inflation.

  • Median inflation is calculated by economists at the Federal Reserve Bank of Cleveland and Ohio State University. If we listed the inflation rate in each individual good or service in the CPI, median inflation is the inflation rate of the good or service that is in the middle of the list—that is, the inflation rate in the price of the good or service that has an equal number of higher and lower inflation rates. 
  • Trimmed-mean inflation drops the 8 percent of goods and services with the highest inflation rates and the 8 percent of goods and services with the lowest inflation rates. 

The following figure shows that 12-month trimmed-mean inflation (the blue line) was 3.2 percent in July, unchanged from June. Twelve-month median inflation (the red line) 3.6 percent in July, unchanged from June.

The following figure shows 1-month trimmed-mean and median inflation. One-month trimmed-mean inflation declined from 3.9 percent in June to 2.9 percent in July. One-month median inflation also declined from 4.1 percent in June to 3.7 percent in July. These data indicate that inflation may have slowed in July (the opposite conclusion we noted earlier when discussing 1-month core inflation), while remaining above the Fed’s 2 percent target.

What are the implications of this CPI report for the actions the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) may take at its next meetings? Even before today’s relatively favorable, if mixed, inflation report, the unexpectedly weak jobs report at the beginning of the month (which we discuss in this blog post) made it likely that the FOMC would soon begin cutting its target for the federal funds rate.

Investors who buy and sell federal funds futures contracts assign a probability of 94.3 percent to FOMC cutting its target for the federal funds rate at its September 16–17 meeting by 0.25 (25 basis points) from its current target range of 4.25 percent to 4.50 percent. That probability increased from 85.9 percent yesterday. (We discuss the futures market for federal funds in this blog post.) Investors assign a probability of 61.5 percent to the FOMC cutting its target again by 25 basis points at its October 28–29 meeting, and a probability of 50.3 percent to a third 25 basis point cut at the committee’s December 9–10 meeting.