Two Measures of Inflation: September 2025

Core Insights - Inflation remains a significant concern, with the core PCE at 2.8% and core CPI at 3.0%, both above the Federal Reserve's 2% target [1][2] Inflation Measures - The Federal Reserve primarily uses the PCE Price Index as its inflation gauge, emphasizing core inflation which excludes volatile food and energy prices [2][3] - Core inflation measures are essential for identifying inflation trends, as they exclude items with dramatic price fluctuations [3] Federal Reserve Actions - The Federal Reserve recently cut the federal funds rate by 25 basis points to a range of 4.00%-4.25%, marking the first rate cut of the year, with expectations for two more cuts by year-end [3][4] - The upcoming Fed meeting is anticipated to result in another 25 basis point rate cut, with an 87% likelihood according to the CME FedWatch Tool [4] Comparison of Inflation Metrics - Core PCE is preferred over core CPI due to its lower volatility, making it a more reliable indicator for the Fed's dual mandate of price stability and maximum employment [5][6] - The historical stability of core PCE has raised questions about the effectiveness of the Fed's monetary policy, especially given the disinflationary trend prior to 2022 [6]