The US consumer price index dropped sharply in November; inflation expectations remained well anchored

1. Data for the Classroom from
Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
US CPI Inflation Turns
Negative; Expected
Inflation Far Below Fed
Targets
Posted Dec 14, 2012
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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 http://dolanecon.blogspot.com

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 http://dolanecon.blogspot.com

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 http://dolanecon.blogspot.com

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 http://dolanecon.blogspot.com

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 http://dolanecon.blogspot.com

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 http://dolanecon.blogspot.com