Trimmed mean PCE inflation – HubbardOBrienEconomics.com Blog

Latest PCE Report Shows Inflation Continuing to Fall

On September 27, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for August, which includes monthly data on the personal consumption expenditures (PCE) price index. Inflation as measured by annual changes in the consumer price index (CPI) receives the most attention in the media, but the Federal Reserve looks instead to inflation as measured by annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the percentage change in the PCE from the same month in the previous year. Measured this way, PCE inflation (the blue line) was 2.2 percent in August, down from 2.7 percent in July. Core PCE inflation (the red line) ticked up in August to 2.7 percent from 2.6 percent in July.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation declined from 1.9 percent in July to 1.1 percent in August, well below the Fed’s 2 percent inflation target. Core PCE inflation declined from 1.9 percent in July to 1.6 percent in August. Calculating inflation this way focuses only on the most recent data, and so reinforces the conclusion that inflation has slowed significantly from the higher rates seen at the beginning of this year.

The following figure shows other ways of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above—although note that PCE inflation is now the red line rather than the blue line), inflation as measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the blue line). Fed Chair Jerome Powell and other members of the Federal Open Market Committee (FOMC) have said that they are concerned by the persistence of elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.

Inflation using the trimmed mean measure was 2.7 percent in August (calculated as a 12-month inflation rate), down only slightly from 2.6 percent in July—still above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in August at 3.7 percent, the same as in July.

Today’s data indicate that the economy is still on a path for a soft landing in which the inflation rate returns to the Fed’s 2 percent target without the economy slipping into a recession. Looking forward, both the Federal Bank of Atlanta’s GDPNow forecast and the Federal Reserve Bank of New York’s GDP Nowcast project that real GDP will increase at annual rate of more than 3 percent in the third quarter (which ends in three days). So, at this point there is no indication that the economy is slipping into a recession. The next Employment Situation report will be released on October 4 and will provide more information on the state of the labor market.

Latest PCE Report Indicates that Inflation May Be Approaching the Fed’s Target

The result when asking GTP-4o to generate “an image illustrating inflation.”

Inflation, as measured by changes in the personal consumption expenditures (PCE) price index, continued a slow decline that began in March. (The Fed uses annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.) On August 30, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for July, which contains monthly PCE data.

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the percentage change in the PCE from the same month in the previous year. Measured this way, in July PCE inflation (the blue line) was 2.5 percent, the same as in June. Core PCE inflation (the red line) in July was 2.6 percent, which was also unchanged from June.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation rose in July to 1.7 percent from 0.7 percent in July—although higher in July, inflation was below the Fed’s 2 percent target in both months. Core PCE inflation was 2.0 percent in July, which was unchanged from June. These data indicate that inflation has been at or below the Fed’s target for the last three months.

The following figure shows another way of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above), inflation measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the red line). Fed Chair Jerome Powell and other members of the Federal Open Market Committee (FOMC) have said that they are concerned by the persistence of elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.

Inflation using the trimmed mean measure was 2.7 percent in July (calculated as a 12-month inflation rate), down only slightly from 2.8 percent in June—and still above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in July at 3.7 percent, although down from 3.9 percent in June.

On balance, taking together these various measures, inflation seems on track to return to the Fed’s 2 percent target. As we noted in this earlier post, last week in a speech at the Federal Reserve Bank of Atlanta’s monetary policy symposium in Jackson Hole, Wyoming , Fed Chair Jerome Powell all but confirmed that the the Fed’s policy-maiking Federal Open Market Committee (FOMC) will cut its target for the federal funds rate at its next meeting on September 17-18. There was nothing in this latest PCE report to reduce the likelihood of the FOMC cutting its target at that meeting by an expected 0.25 percent point from a range of 5.25 percent to 5.50 percent to a range of 5.00 percent to 5.25 percent. There also is nothing in the report that would increase likelihood that the committee will cut its target by 0.50 percentage point, as many investors expected following the weak employment report released by the Bureau of labor Statistics (BLS) at the beginning of August. (We discuss this report and the reaction among investors in this post.)

Latest PCE Report Shows Inflation Continues to Ease

Federal Reserve Chair Jerome Powell at a press conference following a meeting of the Federal Open Market Committee (Photo from federal reserve.gov)

Inflation in 2024 is a tale of two quarters. During the first quarter of 2024, inflation ran higher than expected considering the falling inflation rates at the end of 2023. As a result, although at the beginning of the year many economists and Wall Street analysts had expected the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) would cut its target for the federal funds rate at least once in the first half of 2024, the FOMC left its target unchanged.

On July 26, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for June. The report includes monthly data on the personal consumption expenditures (PCE) price index. The Fed relies on annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target. The report confirmed that PCE inflation slowed in the second quarter, bringing it closer to the Fed’s 2 percent target.

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the percentage change in the PCE from the same month in the previous year. Measured this way, in June PCE inflation (the blue line) was 2.5 percent, down slightly from PCE inflation of 2.6 percent in May. Core PCE inflation (the red line) in June was also 2.5 percent, which was unchanged from May.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation rose in June to 0.9 percent from 0.4 percent in May—although higher in June, inflation was well below the Fed’s 2 percent target in both months. Core PCE inflation rose from 1.5 percent in May to 2.0 percent in June. These data indicate that inflation has been at or below the Fed’s target for the last two months.

The following figure shows another way of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above—although note that PCE inflation is now the red line rather than the blue line), inflation as measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the blue line). Fed Chair Jerome Powell and other members of the Federal Open Market Committee (FOMC) have said that they are concerned by the persistence of elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.

Inflation using the trimmed mean measure was 2.8 percent in June (calculated as a 12-month inflation rate), down only slightly from 2.9 percent in May—and still above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in June at 3.9 percent, down only slightly from 4.0 percent in May.

This month’s PCE inflation data indicate that the inflation rate is still declining towards the Fed’s target, with the low 1-month inflation rates being particularly encouraging. It now seems likely that the FOMC will soon lower the committee’s target for the federal funds rate, which is currently 5.25 percent to 5.50 percent. Remarks by Fed Chair Powell have been interpreted as hinting as much. The next meeting of the FOMC is July 30-31. What do financial markets think the FOMC will decide at that meeting?

Futures markets allow investors to buy and sell futures contracts on commodities–such as wheat and oil–and on financial assets. Investors can use futures contracts both to hedge against risk—such as a sudden increase in oil prices or in interest rates—and to speculate by, in effect, betting on whether the price of a commodity or financial asset is likely to rise or fall. (We discuss the mechanics of futures markets in Chapter 7, Section 7.3 of Money, Banking, and the Financial System.) The CME Group was formed from several futures markets, including the Chicago Mercantile Exchange, and allows investors to trade federal funds futures contracts. The data that result from trading on the CME indicate what investors in financial markets expect future values of the federal funds rate to be. The following chart from the CME’s FedWatch Tool shows the current values from trading of federal funds futures.

The probabilities in the chart reflect investors’ predictions of what the FOMC’s target for the federal funds rate will be after the committee’s July meeting. The chart indicates that investors assign a probability of only 4.7 percent to the FOMC cutting its federal funds rate target by 0.25 percentage point at its July 30-31 meeting and an 95.3 percent probability of the commitee leaving the target unchanged.

In contrast, the following figure shows that investors expect that the FOMC will cut its federal funds rate at the meeting scheduled for September 17-18. Investors assign an 87.7 percent probability of a 0.25 percentage point cut and a 11.9 percent probability of a 0.50 percentage point cut. The committee deciding to leave the target unchanged at 5.25 percent to 5.50 percent is effectively assigned a zero probability. In other words, investors believe with near certainty that the FOMC will reduce its target for the federal funds rate for the first time since the current round of rate increases ended in July 2023.

Latest PCE Report Shows Inflation Slowing

Chair Jerome Powell and other members of the Federal Open Market Committee (Photo from federalreserve.gov)

On Friday, June 28, the Bureau of Economic Analysis (BEA) released its “Personal Income and Outlays” report for April, which includes monthly data on the personal consumption expenditures (PCE) price index. Inflation as measured by annual changes in the consumer price index (CPI) receives the most attention in the media, but the Federal Reserve looks instead to inflation as measured by annual changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the change in the PCE from the same month in the previous year. Measured this way, in May PCE inflation (the blue line) was 2.6 percent in May, down slightly from PCE inflation of 2.7 percent in April. Core PCE inflation (the red line) in May was also 2.6 percent, down from 2.8 percent in April.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation sharply declined from 3.2 percent in April to -0.1 percent in in May—meaning that consumer prices actually fell during May. Core PCE inflation declined from 3.2 percent in April to 1.0 percent in May. This decline indicates that inflation by either meansure slowed substantially in May, but data for a single month should be interpreted with caution.

Inflation using the trimmed mean measure was 2.8 percent in May (calculated as a 12-month inflation rate), down only slightly from 2.9 percent in April—and still well above the Fed’s target inflation rate of 2 percent. Inflation in services remained high in May at 3.9 percent, down only slightly from 4.0 percent in April.

This month’s PCE inflation data indicate that the inflation rate is still declining towards the Fed’s target, with the low 1-month inflation rates being particularly encouraging. But the FOMC will likely need additional data before deciding to lower the committee’s target for the federal funds rate, which is currently 5.25 percent to 5.50 percent. The next meeting of the FOMC is July 30-31. What do financial markets think the FOMC will decide at that meeting?

The probabilities in the chart reflect investors’ predictions of what the FOMC’s target for the federal funds rate will be after the committee’s July meeting. The chart indicates that investors assign a probability of only 10.3 percent to the FOMC cutting its federal funds rate target by 0.25 percentage point at that meeting and an 89.7 percent probability of the commitee leaving the target unchanged.

In contrast, the following figure shows that investors expect that the FOMC will cut its federal funds rate at the meeting scheduled for September 17-18. Investors assign a 57.9 percent probability of a 0.25 percentage point cut and a 6.2 percent probability of a 0.50 percentage point cut. The committee deciding to leave the target unchanged at 5.25 percent to 5.50 percent is assigned a probability of only 35.9 percent.

Another Middling Inflation Report

A meeting of the Federal Open Market Committee (Photo from federalreserve.gov)

On Friday, May 31, the Bureau of Eeconomic Analysis (BEA) released its “Personal Income and Outlays” report for April, which includes monthly data on the personal consumption expenditures (PCE) price index. Inflation as measured by changes in the consumer price index (CPI) receives the most attention in the media, but the Federal Reserve looks instead to inflation as measured by changes in the PCE price index to evaluate whether it’s meeting its 2 percent annual inflation target.

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the change in the PCE from the same month in the previous year. Measured this way, PCE inflation in April was 2.7 percent, which was unchanged since March. Core PCE inflation was also unchanged in April at 2.8 percent. (Note that carried to two digits past the decimal place, both measures decreased slightly in April.)

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, PCE inflation declined from 4.1 percent in March to 3.1 percent in April. Core PCE inflation declined from 4.1 percent in March to 3.0 percent in April. This decline may indicate that inflation is slowing, but data for a single month should be interpreted with caution and, even with this decline, inflation is still above the Fed’s 2 percent target.

The following figure shows another way of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above—although note that PCE inflation is now the red line rather than the blue line), inflation as measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the blue line). Fed Chair Jerome Powell has said that he is particularly concerned by elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation by excluding the prices of goods and services that had particularly high or particularly low rates of inflation during the month.

Inflation using the trimmed mean measure was 2.9 percent in April, down from 3.0 percent in March. Inflation in services remained high, although it declined slightly from 4.0 percent in March to 3.9 percent in April.

It seems unlikely that this month’s PCE data will have much effect on when the members of the Fed’s policy-making Federal Open Market Committee (FOMC) will decide to lower the target for the federal funds rate. The next meeting of the FOMC is June 11-12. That meeting is one of the four during the year at which the committee publishes a Summary of Economic Projections (SEP). The SEP should provide greater insight into what committee members expect will happen with inflation during the remained of the year and whether it’s likely that the committee will lower its target for the federal funds rate this year.

Is Sugar All You Need?

Dylan’s Candy Bar in New York City (Photo from the New York Times)

Can prices of one type of good track inflation accurately? As we’ve discussed in a number of blog posts (for instance, here, here, and here), there is a debate among economists about which of the data series on the price level does the best job of tracking the underlying rate of inflation.

The most familiar data series on the price level is the consumer price index (CPI). Core CPI excludes the—typically volatile—food and energy prices. In gauging whether it is achieving its goal of 2 percent annual inflation, the Federal Reserve uses the personal consumption expenditures (PCE) price index. The PCE price index includes the prices of all the goods and services included in the consumption category of GDP, which makes it a broader measure of inflation than the CPI. To understand the underlying rate of inflation, the Fed often focuses on movements in core PCE.

With the increase in inflation that started in the spring of 2021, some economists noted that the prices of particular goods and services—such as new and used cars and housing—were increasing much more rapidly than other prices. So some economists concentrated on calculating inflation rates that excluded these or other prices from either the CPI or the PCE.

For example, the following figure shows the inflation rate measured by the percentage change from the same month in the previous year using the median CPI and using the trimmed mean PCE. If we list 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. The trimmed mean measure of PCE inflation is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. During the period when the inflation rate was increasing rapidly during 2021 and 2022, CPI inflation increased more and was more volatile than PCE inflation. That difference between movements in the two price level series is heightened when comparing median inflation in the CPI with trimmed mean inflation in the PCE. In particular, using trimmed mean PCE, the inflation of late 2021 and 2022 seems significantly milder than it does using median CPI.

The United States last experienced high inflation rates in the 1970s, when few people used personal computers and easily downloading macroeconomic data from the internet wasn’t yet possible. Today, it’s comparatively easy to download data on the CPI and PCE and manipulate them to investigate how the inflation rate would be affected by dropping the prices of various goods and services. It’s not clear, though, that this approach is always helpful in determining the underlying inflation rate. In a market system, the prices of many goods and services will be affected in a given month by shifts in demand and supply that aren’t related to general macroeconomic conditions.

In a recent blog post, economists B. Ravikumar and Amy Smaldone of the Federal Reserve Bank of St. Louis note that there is a strong correlation between movements in the prices of the “Sugar and Sweets” component of the CPI and movements in the overall CPI. Their post includes the following two figures. The first shows the price level since 1947 calculated using the prices of all the goods and services in the CPI (blue line) and the price level calculated just using the prices of goods included in the “Sugar and Sweets” category (red line). The data are adjusted to an index where the value for each series in January 1990 equals 100. The second figure shows the percentage change from the previous month for both series for the months since January 2000.

The two figures show an interesting—and perhaps surprising—correlation between sugar and sweets prices and all prices included in the CPI. The St. Louis Fed economists note that although the CPI is only published once per month, prices on sugar and sweets are available weekly. Does that mean that we could use prices on sugar and sweets to predict the CPI? That seems unlikely. First, consider that the sugar and sweets category of the CPI consists of three sub-categories:

White, brown, and raw sugar and natural and artificial sweetners
Chocolate and other types of candy, fruit flavored rolls, chewing gum and breath mints
Other sweets, including jelly and jams, honey, pancake syrup, marshmallows, and chocolate syrup

Taken together these products are less than 3 percent of the products included in the CPI. In addition, the prices of the goods in this category can be heavily dependent on movements in sugar and cocoa prices, which are determined in world wide markets. For instance, the following figure shows the world price of raw cocoa, which soared in 2024 due to bad weather in West Africa, where most cocoa is grown. There’s no particular reason to think that factors affecting the markets for sugar and cocoa will also affect the markets in the United States for automobiles, gasoline, furniture, or most other products.

In fact, as the first figure below shows, if we look at the inflation rate calculated as the percentage change from the same month in the previous year, movements in sugar and sweets prices don’t track very closely movements in the overall CPI. Beginning in the summer of 2022—an important period when the inflation that began in the spring of 2021 peaked—inflation in sugar and sweets was much higher than overall CPI inflation. Anyone using prices of sugar and sweets to forecast what was happening to overal CPI inflation would have made very poor predictions. We get the same conclusion from comparing inflation calculated by compounding the current month’s rate over an entire year: Inflation in sugar and sweets prices is much more volatile than is overall CPI inflation. That conclusion is unsurprising given that food prices are generally more volatile than are the prices of most other goods.

It can be interesting to experiment with excluding various prices from the CPI or the PCE or with focusing on subcategories of these series. But it’s not clear at this point whether any of these adjustments to the CPI and the PCE, apart from excluding all food and energy prices, gives an improved estimate of the underlying rate of inflation.

Latest PCE Report Shows Moderate, but Persistent, Inflation

McDonald’s raising the price of its burgers by 10 percent in 2023 led to a decline in sales. (Photo from mcdonalds.com)

Inflation as measured by changes in the consumer price index (CPI) receives the most attention in the media, but the Federal Reserve looks instead to inflation as measured by changes in personal consumption expenditures (PCE) price index when evaluating whether it is meeting its 2 percent inflation target. The Bureau of Economic Analysis (BEA) released PCE data for February as part of its “Personal Income and Outlays” report on March 29.

The following figure shows PCE inflation (blue line) and core PCE inflation (red line)—which excludes energy and food prices—for the period since January 2015 with inflation measured as the change in PCE from the same month in the previous year. Measured this way, PCE inflation increased slightly from 2.4 percent in January to 2.5 percent in February. Core PCE inflation decreased slightly from 2.9 percent to 2.8 percent.

The following figure shows PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, both PCE inflation and core PCE inflation declined in February, but the decline only partly offset the sharp increases in December and January. Both PCE inflation—at 4.1 percent—and core PCE inflation—at 3.2 percent—remained well above the Fed’s 2 percent target.

The following figure shows another way of gauging inflation by including the 12-month inflation rate in the PCE (the same as shown in the figure above—although note that PCE inflation is now the red line rather than the blue line), inflation as measured using only the prices of the services included in the PCE (the green line), and the trimmed mean rate of PCE inflation (the blue line). Fed Chair Jerome Powell has said that he is particularly concerned by elevated rates of inflation in services. The trimmed mean measure is compiled by economists at the Federal Reserve Bank of Dallas by dropping from the PCE the goods and services that have the highest and lowest rates of inflation. It can be thought of as another way of looking at core inflation.

In February, 12-month trimmed mean PCE inflation was 3.1 percent, a little below core inflation of 3.3 percent. Twelve-month inflation in services was 3.8 percent, a slight decrease from 3.9 percent in January. Trimmed mean and services inflation tell the same story as PCE and PCE core inflation: Inflation has decline significantly from its highs of mid-2022, but remains stubbornly above the Fed’s 2 percent target.

It seems unlikely that this month’s PCE data will have much effect on when the members of the Federal Open Market Committee will decide to lower the target for the federal funds rate.