U.S. Consumer price inflation, which has been unusually volatile over the past year, turned sharply negative in November. According to data released today by the Bureau of Labor Statistics, the all-items CPI fell at an annual rate of 3.7 percent during the month of November. That was the most rapid rate of decrease since the worst months of recession in late 2008.

Much of the recent volatility in the CPI has come from the energy sector, particularly gasoline. Consumer inflation spiked at the end of the summer when gasoline prices rose 8.6 percent in August and 6.7 percent in September. Gas prices then fell by 0.5 percent in October and by 6.9 percent in November.

To remove the transient effects of changes in highly volatile prices, economists use various measures of underlying inflation. The most widely cited is the core CPI series published by the BLS, which removes the food and energy components of the all-items CPI. The core CPI rose at a 1.33 percent annual rate in November. The Cleveland Fed takes another approach to measuring underlying inflation. Its 16-percent trimmed mean indicator removes the 8 percent of prices that increase the most in a given month and the 8 percent that increase least (or decrease most), whether they are food, energy, or something else. The 16-percent trimmed mean CPI rose at an annual rate of 1.64 percent in November. The following chart shows these two underlying inflation measures along with the all-items CPI.

Earlier this week, the Federal Open Market Committee, which sets U.S. monetary policy, announced a new version of its inflation and unemployment targets, using this language:

The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

As the above chart indicates, both the all-items and core CPI inflation measures are well below the 2-percent level now. Although the Fed does not give a precise definition of “well anchored,” expected inflation is very moderate over a wide range of time horizons. The Cleveland Fed’s inflation expectation yield curve, shown below, indicates expected inflation of less than 2 percent over all time horizons from one to thirty years, and less than 1.5 percent for time horizons from two to ten years. In short, inflation, either immediate or prospective, appears to be the least among risks facing the U.S. economy as it goes into 2013.