The US headline CPI inflation rate was zero for June. An index of the risk of deflation has begun to rise

1. Data for the Classroom from
Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
US CPI Inflation Near Zero
in June. Deflation Risk
Edges Up
Posted July 17, 2012
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2. US CPI Inflation Near Zero in June
 The headline inflation rate in the
latest BLS inflation report was zero
for June
 Using unrounded data and stating
the monthly change at an annual
rate, seasonally adjusted inflation
was 0.48%
 Without seasonal adjustment, the
CPI decreased at an annual rate of
about 1.2 percent in June, the same
as in May
Posted July 17, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

3. Weak Energy Prices Hold Core Inflation Down
 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.
 The monthly change in core inflation
was 0.2% in June (a 2.43% annual
rate), the same as in May
 Seasonally adjusted energy prices fell
by 1.4 percent in June, and gasoline
by more than 2 percent.
 Food prices rose by .2 percent in June
Posted July 17, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

4. Trimmed Mean Inflation Also Remains Low
 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,
whatever they are
 The 16 percent trimmed mean CPI
increased at an annual rate of 1.9
percent in June
Posted July 17, 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
Posted July 17, 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 measures shown here
have moved steadily downward in
2012. All are close to or below the
Fed’s targets
Posted July 17, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

7. Probability of Deflation Rises
 The Atlanta Fed publishes a weekly
estimate of the probability of deflation
over a 5-year time horizon
 The estimate is based on prices of
Treasury Inflation-Protected Securities
 The risk of deflation tends to rise as
inflation slows and as TIPS traders
begin to think the Fed will undershoot
its inflation targets
 The latest estimate shows a 17
percent probability that the CPI in
April 2017 will be lower than the CPI
in April 2012
Posted July 17, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com