By
Ed
Dolan
:
U.S. inflation data released Friday by the
Bureau of Labor Statistics
show that a two-month spike in headline inflation seems to have run
its course. Both headline and core inflation measures are now close
to or below the Fed's 2 percent target. In a related development,
the
Atlanta Fed
reports that deflation probabilities have nosedived since President
Obama won re-election earlier this month.
The headline all-items CPI increased at an annual rate of just
1.81 percent in October, down from 7.48 percent in August and 7.06
percent in September. Most of the decrease came from a drop in
energy prices, which had soared in the previous two months. New and
used car prices also fell. Increases in the prices of food and
apparel partly offset the decreases in energy and vehicles.
Measures of underlying inflation, which had not followed the
late-summer spike of the all-items CPI, remained moderate. The BLS
core CPI, which excludes food and energy prices, increased at a
2.18 annual rate in October. The Cleveland Fed's 16-percent trimmed
mean inflation rate increased at annual rate of 1.69 percent. The
trimmed mean measure of underlying inflation excludes the 8 percent
of prices that increase the most in a given month and also the 8
percent of prices that increase least (or decrease most), whether
they are energy, food, or anything else. The following chart shows
all three measures.
(click to enlarge)
Meanwhile, an indicator of deflation probability published by
the Atlanta Fed has nosedived since the election. The probability
that the CPI on April 15, 2017 will be below its level of April 15,
2012 fell from 11.52 percent the day before the election to 8.81
percent on November 14th. The decrease could be interpreted as
indicating that investors believe President Obama will safely steer
the economy through the recession risk posed by political gridlock
and the fiscal cliff.
The Atlanta Fed calculates the probability of inflation over a
five-year interval by comparing the prices of newly issued Treasury
Inflation Protected Securities ((
TIPS
)) with those of previously issued TIPS having similar maturities.
The
methodology
is based on the fact that newly issued TIPS of a given maturity
offer a slightly greater degree of deflation protection than those
issued earlier. As the chart shows, the risk of deflation is now at
its lowest level in more than a year.
(click to enlarge)
TIPS prices can also be used to estimate expected inflation. The
method used by the
Cleveland Fed
tries to measure expectations for various time horizons while, at
the same time, isolating the element in expected TIPS prices that
represents a risk premium rather than future inflation. The next
chart gives their five- and ten-year expected inflation rates. The
fact that expectations of both inflation and deflation are falling
suggests growing confidence that monetary and fiscal policymakers
will neither plunge the economy into a new depression nor allow an
outbreak of inflation. However, note that both the five-year and
ten-year expected inflation rates are well below the Fed's target
of 2 percent. That implies market participants do not expect the
Fed's current program of quantitative easing to meet its objectives
in full and on schedule.
(click to enlarge)
See also
Paul Krugman Will Not Like These Figures
on seekingalpha.com