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October Price Statistics

The Consumer Price Index (CPI) decreased at an annualized rate of 10.9 percent in October. It was the largest monthly decrease on record in the series (which goes back to 1947), conjuring the specter of deflation just four short months after inflation looked to be a major concern. Moreover, the core CPI fell 0.9 percent in October, its first price dip since December 1982. Energy prices decreased dramatically during the month (65.9 percent at an annualized rate) and were responsible for much of the headline price decrease. However, falling gas prices are not the whole story, as evidenced by the declining core CPI.

October Price Statistics

Percent change, last
1mo.a 3mo.a 6mo.a 12mo. 5yr.a 2007 avg.
Consumer Price Index
All items -10.9 -4.4 2.8 3.7 3.2 4.2
Less food and energy -0.9 1.1 2.3 2.2 2.2 2.4
Medianb 1.8 2.7 3.3 3.2 2.8 3.1
16% trimmed meanb -0.6 0.7 3.1 3.0 2.6 2.8
Producer Price Index
Finished goods -28.5 -15.2 0.5 5.1 4.0 7.1
Less food and energy 5.1 4.4 4.6 4.4 2.3 2.1
a. Annualized.
b. Calculated by the Federal Reserve Bank of Cleveland.
Sources: U.S. Department of Labor and Bureau of Labor Statistics.

Turning to the measures of underlying inflation calculated by the Federal Reserve Bank of Cleveland, the median CPI rose 1.8 percent, while the 16 percent trimmed-mean CPI fell 0.6 percent (its second price decrease since the series began in 1982). The CPI trimmed-mean estimators exclude the components in the CPI that show the most extreme monthly price changes and are much less volatile than either the CPI or the more traditional core CPI, making them more useful guides in evaluating inflation trends. Lately, the 16-percent trimmed-mean CPI and median CPI have been diverging somewhat. For example, over the past three months, the median CPI is up 2.7 percent, while the 16-percent trimmed-mean has increased only 0.7 percent. Over the past four months, the 16 percent trimmed-mean measure has been picking up on some of the extreme prices swings that are excluded from the median. At least 50 percent of the CPI's components (by expenditure weight) exhibited price decreases or increases at rates exceeding 5 percent.

Trimmed-Mean CPI Measures

An investigation into the price-change distribution of CPI components may reveal why the overall index exhibited such a large decline. In October, 33 percent of the CPI's components (by expenditure weight) decreased, while only 9 percent fell in July. Also, only 34 percent rose at rates exceeding 3.0 percent in October, compared to 60 percent in July and a year-to-date average of roughly 50 percent. Deflation requires sustained, broad-based price declines. We can see that the rate of price increases slowed in October, and the prices of some components did actually decline during the month. However, based on this report alone, it would be more than a stretch to declare that deflation has set in.

CPI Component Price Change Distributions

Over the past 12 months, the CPI is up 3.7 percent, down considerably from July's recent year-over-year high of 5.6 percent. The 12-month trends in the underlying inflation measures (core, trim, and median) have fallen as well, and are ranging between 2.2 percent and 3.2 percent.

CPI, Core CPI, and Trimmed-Mean CPI Measures

According to the November preliminary release of the University of Michigan's Survey of Consumers, 21 percent of respondents expect zero inflation in the year ahead, while 16 percent actually expect deflation. Consequently, short-term (one-year ahead) average inflation expectations fell to 2.9 percent in early November. Long-term (5-10 year) average inflation expectations have remained more stable over the past few months, and actually increased from 3.1 percent in October to 3.3 percent in November.

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