US inflation move slightly higher in January. Revisions remove much of the volatility from data previously reported for 2011

1. Data for the Classroom from
Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
US Price Data: CPI
Revisions Cut Volatility,
January Inflation Up a Bit
Posted February 18, 2012
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2. CPI Inflation Speeds Up a Bit in January
 The US all-items CPI showed a
moderate increase in inflation in
January, reflecting stronger growth
of the economy
 The January headline inflation rate
from the Bureau of Labor Statistics,
stated as an annual rate, was 2.43%
 Prices increased across the board,
including food, energy, shelter,
apparel, and recreation
Posted February 18, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

3. Revisions Remove Volatility from 2011 Data
 The BLS report included revisions to
previously reported 2011 data based
on updated seasonal adjustment
factors
 The revisions did not affect the year-
on-year inflation rate for 2011, but they
removed a large part of the volatility
from the monthly data
Posted February 18, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

4. Core Inflation Also Rises in January
 Food and energy prices are highly
volatile and usually account for much
of the month-to-month variation in the
CPI
 Their effect can be removed by taking
food and energy out of the CPI. The
result is called the core inflation rate.
 In January 2012, however, the food
and energy inflation rates were the
same as the all-items rate, so the core
and headline CPI did not differ
Posted February 18, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

5. Trimmed Mean Inflation Also Rises
 Another way to remove volatility is
the 16% trimmed mean CPI
published by the Federal Reserve
Bank of Cleveland. It removes the
8% of prices that increase most and
the 8% that increase least in each
month, whatever they are
 Trimmed mean inflation was a
moderate at just under 3% for
January, stated as an annual rate
Posted February 18, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

6. Which Measure is Best?
 The CPI for all items gives the most
accurate picture of current changes
in the cost of living
 Economists at the Fed look closely
at the core and trimmed mean CPIs
to judge the effect of monetary policy
on underlying inflationary trends
 The Fed considers inflation of about
2 percent to be consistent with
prudent monetary policy
 All three measures of inflation were
moved slightly above the Fed’s 2%
target in January
Posted February 18, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

7. The Longer Term Trend
 To see longer term trends in
inflation, it is useful to look at year-
on-year changes, which compare
each month’s price level with that of
the same month in the year before
 All y-o-y measures of inflation rates
slowed during the global
recession, then rose againfor most
of 2011.
 The three measures shown here
have been converging in recent
months as inflation becomes less
volatile
Posted February 18, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com