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Friday, February 21, 2014

US CPI Inflation Continues to Run Well Below Target as Revisions Reduce Monthly Volatility

Data released this week by the Bureau of Labor Statistics show that consumer price inflation continues to run well below target. The all-items CPI for urban consumers rose at a seasonally adjusted annual rate of 1.75 percent in January, compared with the Fed’s inflation target of 2 percent. The seasonally adjusted core inflation rate for the month, which removes the effect of food and energy prices, was 1.54 percent.

The BLS makes seasonal adjustments to the CPI in an attempt to remove the effects of price changes that happen at predictable times each year, such as more expensive gasoline when the summer driving season starts and lower food prices in the harvest season. Although the adjustments are supposed to give a more accurate picture of underlying trends,  as the structure of the economy changes the adjustment factors become outdated. Accordingly, the BLS revises its seasonal adjustment factors early in each year. The following chart shows that the revisions remove much of the previously reported month-to-month volatility in the CPI while leaving the average inflation rate essentially unchanged. >>>Read more

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