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U.S. Inflation Indicators Come in Below Target as the Global Economy Begins to Slow

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The document summarizes US inflation data for December 2012. It reports that the headline CPI showed little change, core inflation slowed slightly to 1.8%, and trimmed mean inflation remained moderate at 1.5%. All three major inflation indicators remained below the Fed's implicit 2% inflation target for December. The document also notes that economists look at core and trimmed mean inflation to judge underlying trends, and that longer-term year-over-year inflation rates are beginning to fall again.

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Data for the Classroom from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ US Price Data: Major Inflation Indicators Run Below Target in December Posted Jan 19, 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.

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Headline CPI Shows Little Change in December  The US all-items CPI showed little change in December, as the World Bank released a new forecast of slowing global economic growth  The December headline inflation rate from the Bureau of Labor Statistics showed zero change  Unrounded, December inflation stated as an annual rate was 0.12%  For the third month in a row, falling prices for gasoline and other forms of energy helped keep inflation low Posted January 19, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

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Core Inflation Slows Slightly  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 was 1.8% in December (monthly change stated as annual rate), down slightly from November  Rising prices for medical goods and services made the largest contribution to core inflation Posted January 19, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

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Trimmed Mean Inflation Remains Moderate  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  Trimmed mean inflation was a moderate 1.5% annual rate in December, up just slightly from its November low for the year Posted January 19, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

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Which Measure is Best?  The CPI for all items gives the most accurate picture 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 of inflation were below the Fed’s implicit 2% target in December Posted January 19, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

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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. They rose for most of 2011, but are now beginning to fall again as the base for y-o-y comparisons moves away from the extremely low monthly rates of 2010 Posted January 19, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

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U.S. Inflation Indicators Come in Below Target as the Global Economy Begins to Slow

  • 1. Data for the Classroom from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ US Price Data: Major Inflation Indicators Run Below Target in December Posted Jan 19, 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. Headline CPI Shows Little Change in December  The US all-items CPI showed little change in December, as the World Bank released a new forecast of slowing global economic growth  The December headline inflation rate from the Bureau of Labor Statistics showed zero change  Unrounded, December inflation stated as an annual rate was 0.12%  For the third month in a row, falling prices for gasoline and other forms of energy helped keep inflation low Posted January 19, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  • 3. Core Inflation Slows Slightly  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 was 1.8% in December (monthly change stated as annual rate), down slightly from November  Rising prices for medical goods and services made the largest contribution to core inflation Posted January 19, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  • 4. Trimmed Mean Inflation Remains Moderate  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  Trimmed mean inflation was a moderate 1.5% annual rate in December, up just slightly from its November low for the year Posted January 19, 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 picture 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 of inflation were below the Fed’s implicit 2% target in December Posted January 19, 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. They rose for most of 2011, but are now beginning to fall again as the base for y-o-y comparisons moves away from the extremely low monthly rates of 2010 Posted January 19, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com