The BEA's Personal Consumption Expenditures Chain-type Price Index for April shows core inflation well below the Federal Reserve's 2% long-term target at 1.05%, the lowest Core PCE ever recorded; the previous all-time low was 1.06% in March 1963, fifty years ago. The Core Consumer Price Index release earlier this month, also data through April, is significantly higher at 1.72%. The Fed is on record as using PCE as its primary inflation gauge.
Elsewhere the Fed stresses the importance of longer-term inflation patterns, the likelihood of persistence and the importance of "core" inflation (less food and energy). Why the emphasis on core? Here is an excerpt from one of the Fed FAQs.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances. [Source]
Note: Bolding added by me.
Fed's Short-Term Target Broadened to 2% to 2.5%
Finally, policymakers examine a variety of "core" inflation measures to help identify inflation trends. The most common type of core inflation measures excludes items that tend to go up and down in price dramatically or often, like food and energy items. For those items, a large price change in one period does not necessarily tend to be followed by another large change in the same direction in the following period. Although food and energy make up an important part of the budget for most households--and policymakers ultimately seek to stabilize overall consumer prices--core inflation measures that leave out items with volatile prices can be useful in assessing inflation trends. [Source]
In the shorter term, however, the Fed has raised the top range of its inflation target by half a percent. The change was announced to the public in the December 12, 2012 FOMC press release...MORE including charts
Friday, May 31, 2013
Inflation: Core Personal Consumption Expenditures At All-time Low
From Advisor Perspectives:
