US CPI Inflation Remains Near Zero as Sequester Looms


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US CPI inflation was essentially zero in January 2013 for the second month in a row

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US CPI Inflation Remains Near Zero as Sequester Looms

  1. Data for the Classroom from Ed Dolan’s Econ Blog US CPI Inflation Turns Negative; ExpectedInflation Far Below Fed Targets Posted Dec 14, 2012 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.
  2. Consumer Prices Fall Sharply in November The all-items U.S. consumer price index fell at an annual rate of 3.7 percent in November. Most of the decrease in the CPI came from a drop in energy prices, especially gasoline, which had soared at the end of the summer. CPI inflation has been unusually volatile over the past two years, but the trend appears to be more downward than upward. Posted Dec. 14, 2012 on Ed Dolan’s Econ Blog
  3. Core Inflation Falls, but Remains Positive Food and energy prices are volatile and usually account for much of the month-to-month change 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. Core inflation for November fell to an annual rate of 1.33 percent, a little below the average for the year Posted Dec. 14, 2012 on Ed Dolan’s Econ Blog
  4. Trimmed Mean Inflation Also Falls Another way to remove volatility is the 16% trimmed mean CPI published by the Federal Reserve Bank of Cleveland. It removes the 8% of prices that increase most and the 8% that increase least in each month (or decrease most), whatever they are The 16 percent trimmed mean CPI slowed to an annual rate of 1.64 percent in November, about the same as the previous month Posted Dec. 14, 2012 on Ed Dolan’s Econ Blog
  5. Which Measure is Best? The CPI for all items gives the most accurate measure of current changes in the cost of living Economists at the Fed look closely at the core and trimmed mean CPIs to judge the effect of monetary policy on underlying inflationary trends The Fed considers inflation of about 2 percent to be consistent with prudent monetary policy. All three measures were below that value in November. Posted Dec. 14, 2012 on Ed Dolan’s Econ Blog
  6. 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 year before All y-o-y measures of inflation rates slowed during the global recession, then rose again for most of 2011. The three y-o-y series shown here are all now below the Fed’s 2 percent target Posted Dec. 14, 2012 on Ed Dolan’s Econ Blog
  7. Inflation Expectations Remain “Well Anchored” In early December, the Fed announced that it would keep interest rates low until the unemployment rate fell to 6.5 percent (it is now 7.7 percent) and as long as inflation expectations remained “well anchored,” that is, below 2 ½ percent for a two-year time horizon and below 2 percent for longer horizons. This chart from the Cleveland Fed suggests that inflation expectations remain “well anchored.” Posted Dec. 14, 2012 on Ed Dolan’s Econ Blog