Ed Dolan's Econ Blog

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

U.S. inflation data for December showed prices rising at a very moderate pace. The latest data from the Bureau of Labor Statistics showed the headline all-items CPI inflation at zero. When the unrounded monthly data is restated as an annual rate, it comes to a negligible 0.12 percent.

Alternative measures of inflation were also very low in December. Core inflation, which omits the effects of changes in prices of food and energy, slowed to an annual rate of 1.8 percent. The Cleveland Fed’s 16 percent trimmed mean inflation rate rose even less rapidly, at an annual rate of just 1.5 percent, only slightly above its November low for the year. That rate omits the 8 percent of prices that rise most rapidly each month and the 8 percent that rise least, regardless of whether they are food, fuel, or something else.

Many economists consider the core and trimmed-mean inflation rates to reflect the effects of monetary policy more accurately than the all-items CPI. In December, as in October, all three rates came in below the Fed’s implicit inflation target of 2 percent, something that has happened only once before (in October) during the past year.

Year-on-year inflation also fell in December, from 3.39 percent to 2.96 percent. Y-o-y inflation is a lagging statistic; it will continue to decline as the months of relatively high inflation in the first half of 2011 drop out of the 12-month calculation.

The inflation data came on the heels of a World Bank report that warned of a global growth slowdown in 2012. The bank is now expecting developing countries to grow just 5.4 percent this year, down from a previous forecast of 6.2 percent. The forecast for the euro area is a recessionary -0.3 percent, down from a positive 1.8 percent forecast earlier. The bank thinks the U.S. economy will grow only 2.2 percent next year, down from 2.9 percent.

The low December inflation numbers combined with the forecast of a global growth slowdown confirmed that there is essentially no medium-term risk of excessive inflation from the demand side of the economy or from monetary policy. Data from the job market and manufacturing have been slightly more encouraging in recent weeks, but it remains to be seen if those trends will hold up in the face of a global slowdown.

The bottom line: With inflation stuck at low levels, there remains a substantial risk that nominal GDP growth will remain too weak to make progress toward closing the output gap. The risk of absolute deflation continues to loom in the background should global growth turn out to be even slower than the World Bank’s latest revised forecast.

Follow this link to view or download the latest inflation data in slideshow format.


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