US Inflation Data: Scant Fuel for Inflation Fears in September CPI Report

Data for the Classroom from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ US Inflation Data: No Fuel for Inflation Fears in September Report Posted Oct 22, 2011 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.

Headline CPI Inflation Slows Again in September
Although some observers think the Fed’s easy monetary policy risks a rise in inflation, there was scant fuel for their fears in the September inflation report
The US all-items CPI rose at a seasonally adjusted annual rate of 3.7% in September, 2011, down almost a point from the August rate of 4.6%
Gasoline and food prices, as well as medical services, contributed to inflation in August, as in the previous month.
Posted October 22, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Core Inflation Falls to Lowest Rate of the Year
Food and energy prices are highly volatile and account for much of the month-to-month variation in the CPI
Their effect can be removed by taking food and energy out of the CPI
The result is called the core inflation rate, which fell to just 0.6% in September (monthly change stated as annual rate), the slowest for the year
Because food and energy prices contributed more than their share to inflation, as they have for most of the year, the core inflation rate was below the all-items rate

“ Trimmed Mean” CPI also Slows
Another way to remove volatility from the CPI series is the 16% trimmed mean CPI published by the Federal Reserve Bank of Cleveland
The trimmed mean CPI removes the 8% of prices that increase most and the 8% that increase least in each month, whether they are food, energy, or something else
In July, the trimmed mean inflation slowed significantly, although it remained above the core inflation rate

Which Measure is Best?
The CPI for all items gives the most accurate picture of current changes in the cost of living for urban consumers
The core CPI and trimmed mean CPI give more accurate pictures of underlying trends
Economists at the Fed look closely at the core and trimmed mean CPIs to judge the effect of monetary policy
In contrast, the all-items CPI includes food and energy prices that are set on world markets, beyond direct control of monetary policy

The Longer Term Trend
To see longer term trends in inflation, it is useful to look at year-on year changes, which compare each month’s price level with that of the same month in the previous year
All measures of inflation rates slowed during the global recession, but they are now rising again
The Fed considers 2% annual inflation to be consistent with prudent monetary policy in the long run

US Inflation Data: Scant Fuel for Inflation Fears in September CPI Report

by Ed Dolan on Oct 22, 2011

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US Inflation Data: Scant Fuel for Inflation Fears in September CPI Report — Presentation Transcript