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Ed Dolan's Econ Blog

All Major US Inflation Measures Fall Below Fed Targets in May

The latest data from the Bureau of Labor Statistics show sharply lower inflation. The headline number, the consumer price index for all urban consumers (CPI-U) fell at a seasonally adjusted annual rate of 3.31 percent in May, its fastest rate of decline since 2008, when the economy was still contracting. Even without seasonal adjustment, the CPI-U fell at an annual rate of 1.2 percent in the month.

As the chart shows, measures of underlying inflation also slowed sharply from April to May, although they remained positive. The core CPI from the BLS, which removes volatile food and energy prices from the CPI-U, was almost flat, rising at only a 0.24 percent annual rate. The main reason was that energy prices, which usually increase at this time of year, actually fell. For example, the price of gasoline normally rises by about 3.2 percent from April to May. This year, instead, the unadjusted price fell by 3.6 percent. Putting the two numbers together, there was a 6.8 percent seasonally adjusted decrease for the month. Other energy prices also moved downward.

Instead of core inflation, some economists prefer to look at the Cleveland Fed’s 16 percent trimmed mean inflation. Rather than removing food and energy from the index, trimmed mean inflation removes the 8 percent of prices that increase most each month, and the 8 percent that decrease most (or increase least). That inflation measure also slowed sharply, from an annual rate of 1.94 percent in April to 1.10 percent in May.

The unadjusted CPI provides the most accurate picture of what is happening right now to the actual cost of living experienced by consumers. Economists watch measures of underlying inflation not for what they say about the cost of living, but because they strip away statistical noise and reveal the part of inflation that is more likely to be responsive to monetary policy. The Fed maintains that an inflation rate of about 2 percent is consistent with its mandate to maintain price stability.

Sometimes the price stability mandate conflicts with the other component of the Fed’s dual mandate, which is maintenance of full employment. When that happens, policymakers must balance inflation risks against unemployment. Right now, however, there is no conflict. The latest jobs and GDP numbers are also very negative. With output growth slowing, unemployment rising, and inflation falling well below target by a variety of measures, the Fed is getting a real wakeup call.

Things are not looking all that healthy abroad, either. The economies of the BRICs are slowing. Europe is already in recession, with the only question being whether the recession will morph into a collapse. Fiscal policy is on a downslope to the cliff, as I noted earlier in the month. Of course, the Fed may be hoping that something will come along to pull the economy out of the ditch before it is forced to undertake further measures of its own. However, it is increasingly hard to see what that might be.

Follow this link to view or download a brief slideshow with detailed charts of the latest inflation data.

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