Easing Inflation Pressure Gives Fed Extra Room to Maneuver in Face of Euro Crisis
US inflation pressures continued to ease in October, according to the latest data from the Bureau of Labor Statistics. With the struggling US economy facing headwinds from the euro crisis, low inflation gives the Fed a welcome extra bit of room to maneuver.
The headline CPI actually fell at a 1 percent rate during October. (All inflation rates given in this post are seasonally adjusted monthly changes stated as annual rates.) Energy prices were the main factor driving headline inflation downward. Negative inflation is unlikely to persist, however, given that world oil prices have already pushed back over $100 a barrel this week.
Core inflation remained moderate in October, rising just slightly to a 1.7 percent annual rate. Apparel prices and prices of medical goods and services helped pull the core rate up a bit from September’s 0.6 percent, which was the low for the year.
Another key indicator, the Cleveland Fed’s 16 percent trimmed mean CPI, rose at an annual rate of just 1.4 percent in October, down slightly from the previous month. The trimmed mean CPI, like the core inflation rate, aims to reveal underlying inflation trends by removing the most volatile inflation components. Unlike the core CPI, which always removes food and energy prices, the trimmed mean CPI takes out the 8 percent of prices that increase most and the 8 percent that increase least during a given month, whatever those prices happen to be.
November is the first month this year that all three of these inflation indicators have come in at annual rates below 2 percent. The Fed does not set an official inflation target, but it has made it clear that it considers an inflation rate at or close to 2 percent as consistent with its price stability mandate.
Newly released third-quarter GDP data show growth in Europe coming almost to a standstill. If, following the recent pattern, European governments respond to slowing growth with a new round austerity measures, a European recession becomes a distinct possibility. With fiscal policy paralyzed by Washington politics, hope of any offsetting stimulus for the U.S. economy rests almost entirely with the Fed.
Low inflation figures should strengthen the position of economists inside and outside the Fed who have been arguing for a more strongly expansionary policy, perhaps in the form of NGDP targeting. Die-hard inflation hawks who have resisted such moves will find themselves increasingly isolated if the price level trends for October and November continue through the end of the year.
Follow this link to view or download a slideshow presenting the latest US inflation data in a form suitable for classroom or business presentation.
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