Inflation Under Control as Fed Presses on Interest Rates

Written by: Alan Edwards

The United States Labor Department released its December 2012 Consumer Price Index Report. Overall consumer prices remain unchanged from November in large part due to a drop in gasoline prices. The year-end report was in line with analysts’ expectations and is a strong indicator that with inflation under control prices will increase less than 2.5 percent for the foreseeable future.

The soft inflation numbers also mean that the Federal Reserve Bank will continue its QE3 policy to keep long-term interest rate down by its Treasury bond and mortgage-backed security buying program. Recently, Federal Reserve Chairman Ben Bernanke had said that until the unemployment rate dropped below 6.5 percent or the inflation rate hit 2.5 percent the Fed will continue to keep both short and long- term interest rates down.

Once again gasoline prices fell, December recorded a 2.3 percent decrease continuing a three month drop in prices. The drop in gasoline prices offset a small increase in both food and shelter costs.

The Fed’s ongoing attempts to lower interest rates have helped stabilize the residential home market, and housing is expected to show substantial gains thus providing a boost to the American economy in 2013. As of January 11, 2013 the Mortgage Bankers Association reported that for the first two weeks of 2013 home mortgages rose.

Weak inflation in December boosted consumer’s purchasing power. Inflation-adjusted weekly earnings saw the 0.6 percent increase according to a separate report issued by the Labor Department.

Clothing prices fell by 0.1 percent while new motor vehicle prices were unchanged, that used cars and trucks had a price decrease of 0.4 percent, falling for a sixth consecutive month.

The Federal Reserve does not use the consumer price index to measure inflation, it uses a different index that is calculated by the Commerce Department. Nevertheless both indexes usually nearly mirror image of one another in which ever calculation is used, the annual inflation rate is below the Federal Reserve’s two percent target. Overall the 2012 inflation rate rose 1.7 percent showing are better performance 2011 prices rose 3 percent.

During 2012 energy prices rose only 0.5 percent which were much better than its 2011 performance which increased by 6.6 percent in the same vein in 2012 food prices rose by 1.8 percent which was far less in 2011 when the cost of food increased by 4.7 percent the core CPI removes both food and gas because they have such volatile swings. The core CPI increased more slowly in 2012 than in 2011–in 2012 it rose 1.9 percent in 2011 it rose 2.2 percent.

Take Away

Stubborn unemployment (above 6.5 percent) continues while overall inflation is below the 2.5 percent target set by the Fed. This means that in 2013 the Federal Reserve will continue its efforts to keep interest rates low.


Inflation Under Control as Fed Presses on...

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