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Ed Dolan's Econ Blog

Headline Inflation Stays High in September on Energy Prices but Other Indicators Show Calm beneath the Surface

The BLS reported today that the headline all-items CPI rose by a seasonally adjusted 0.6 percent in September. If we restate the unrounded data as an annual rate, that comes to 7.4 percent, just a whisker lower than August’s annualized rate of 7.5 percent.

The elevated inflation rates of the past two months have their origins almost entirely in the energy sector. The core CPI, which excludes food and energy, rose at an annual rate of just 1.77 percent in September, up only slightly from the August rate of 0.63 percent. An alternative measure of underlying inflation, the Cleveland Fed’s 16-percent trimmed mean, came in in at an annual rate of 2.56 percent for the month.

Year-on-year measures of inflation also remained low. The all-items CPI rose just 1.99 percent since September 2011. It was the fourth consecutive month that high-profile indicator has been below 2 percent. The year-on-year figures were 1.99 percent for the core CPI and 1.87 percent for the 16-percent trimmed mean.

A variety of forward-looking indicators also suggest a continued low-inflation environment in the months and years ahead:

  • One widely cited indicator of inflation expectations, the spread between the yield on 10-year Treasury securities and that on inflation protected Treasuries (TIPS) of similar maturity, now stands at 2.48 percent.
  • Economists at the Cleveland Fed maintain that the TIPS spread does not tell the whole story, since it conflates pure inflation expectations with a risk premium that reflects uncertainty regarding the inflation rate. Using a methodology that they claim overcomes that problem, they report a 10-year expected inflation rate of just 1.5 percent as of October 16.
  • Still other economists use a survey approach to measuring expected inflation. For example, the Atlanta Fed’s survey of business inflation expectations in the sixth district showed a one-year expected rate of 1.7 percent as of mid-September, down from 1.9 percent in August.
  • Finally, the Atlanta Fed also publishes an interesting indicator that turns the question of inflation expectations on its head by measuring the likelihood that the economy will enter deflation. The estimate of the probability of deflation over the period from 2012 to 2017 time rose to 12.8 percent as of October 11, up from 11.7 percent on September 17.

The bottom line: Despite the scary CPI headlines, inflation is pretty quiet and likely to remain so. There is nothing in today’s numbers to suggest any second thoughts about the Fed’s decision to pursue a robustly accommodative monetary policy until there is broad evidence of an upturn in the economy.

2 Responses to “Headline Inflation Stays High in September on Energy Prices but Other Indicators Show Calm beneath the Surface”

evodevo1October 25th, 2012 at 7:24 am

There won't be any upturn till there are real jobs and real wage increases. Till then, it's "managed" deflation for everyone.