The late-summer spike in US CPI inflation ended in October. Deflation expectations fell sharply after the November election, and inflation expectations remain low

1. Data for the Classroom from
Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
Late-Summer Inflation
Spike Ends; Deflation
Expectations Nosedive on
Election Results
Posted Nov. 11, 2012
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2. Late-Summer Inflation Spike Seems to Have Run its Course
 The all-items U.S. consumer price
index rose at an annual rate of just
1.81 percent in October, down from
a spike to 7.48 percent in August
and 7.06 percent in September.
 Most of the slowdown came from a
drop in energy prices, which had
soared in the previous two months.
 New and used car prices also fell.
Increases in the prices of food and
apparel partly offset the decreases
in energy and vehicles.
Posted Nov. 17, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

3. Core Inflation Remains Moderate
 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 October was 2.18
percent, about the average for the
year
Posted Nov. 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 (or decrease most), whatever
they are
 The 16 percent trimmed mean CPI
slowed to an annual rate of 1.69
percent in October
Posted Nov. 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. All three
measures were close to that value in
October.
Posted Nov. 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 y-o-y series shown here
are all now close to Fed’s 2 percent
target
Posted Nov. 17, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

7. Deflation Probabilities
 The Atlanta Fed uses Treasury
Inflation Protected Securities (TIPS)
prices to calculate the probability of
deflation over a given 5-year period
 This chart shows that the risk of
deflation dropped sharply after the
election
Posted Nov. 17, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

8. Expected Inflation
 The Cleveland Fed uses the same
TIPS prices to estimate expected
inflation over 5- and 10-year time
horizons
 Inflation expectations have been
trending downward for several
years
 The most recent months show a
moderate increase, perhaps
reflecting an expectation that the
Fed’s latest program of quantitative
easing will have its intended effect
of raising inflation close to the 2-
percent target
Posted Nov. 17, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com