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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




    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.
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
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
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
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
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
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

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US CPI Falls Sharply in November

  • 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 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 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