IT IS HARD to overstate the time that goes into calculating a consumer-price index. In America statisticians survey nearly 10,000 people every quarter, construct a sample of some 80,000 things they buy, and then monitor their prices by ringing up thousands of shops, restaurants and offices. So the hard-working boffins might be miffed to learn that the Federal Reserve thinks a better way of tracking inflation is simply to lop off the things with the biggest price swings. The result that emerges is known as “trimmed mean” inflation. As America goes through its most sustained bout of price pressure since 1990, this narrower measure is more than an academic exercise.
In August the headline consumer-price index was 5.3% higher than a year ago, according to data published on September 14th. It was the third consecutive month of inflation at roughly that pace. By contrast the trimmed-mean rate—using the Fed’s preferred measure, the personal consumption expenditures (PCE) price index—has remained at just about 2%, in line with the central bank’s inflation target.
The gap between the headline scare and the far more subdued alternative gets to the heart of the debate about whether the current burst of inflation is transitory or persistent. Those taking the former view argue that a small number of goods and services have driven the jump in inflation, almost all traceable to pandemic-related disruptions. The price of flights, for example, soared as air travel roared back, but in August ticket prices slumped as the Delta variant of covid-19 dampened enthusiasm for travel. The trimmed index is appealing because it strips out such outliers. Jerome Powell, the Fed’s chairman, has pointed to the measure as evidence that price pressures are not yet broad-based.
There are two possible objections to using the trimmed measure. The first is that the Fed is cherry-picking, emphasising whatever inflation gauge looks most flattering. Central bankers often highlighted narrower “core” inflation in order to better capture underlying trends. In the past the Fed would point to the PCE index excluding food and energy prices. But this measure is less well-behaved this time, rising to 3.6% year-on-year in July, a three-decade high. Hence the suspicion that the trimmed mean is a handy substitute.
That, though, is unfair to the Fed. Central bankers have been tracking the trimmed measure since well before the pandemic. The Dallas Federal Reserve has published a version since 2005. A research note by Fed economists released in 2019 found that trimmed-mean gauges are less volatile than headline indices and better predictors of future price changes.
By focusing on the middle of the price pack, the trimmed mean gauge also helps reveal just how widespread price pressures truly are. (The Dallas Fed orders all items from highest price increase to the lowest, and lops off the top 31% and the lowest 24%, as judged by expenditure weights.) Trimming the mean also answers one of the standard complaints about core-inflation gauges that exclude food or energy prices—namely, that people spend so much money filling their bellies and their petrol tanks that it makes little sense to ignore these costs systematically. Food and energy are included in trimmed indices, so long as their price swings are not unusually wild.
The second objection is more damaging: that the trimmed mean is more worrying than Mr Powell would have it. Economists at the Dallas Fed say that, as a rough guide, when headline inflation exceeds the trimmed mean by one percentage point, it feeds through to about 0.25 percentage points of additional trimmed-mean inflation in a year’s time. On this basis the trimmed-mean rate is likely to hit 2.5% by the end of next year. A different trimmed mean calculated by the Cleveland Fed, which is less eager in its snipping, has already jumped, climbing to 3% from 2% at the start of the year.
However you trim, the conclusion seems clear enough. Inflation is not as bad as the headlines suggest. But price pressures are steadily spreading.