Friday, October 29, 2004

The media headline measure of inflation in the US is the Consumer Price Index (CPI). The Federal Reserve has its own favorite measure, however, the price index for Personal Consumption Expenditures (PCE). Today's numbers on the third quarter show PCE inflation took a major nosedive this summer.

During the deflation scare of late 2003, annual PCE inflation was running at 1.7% and core PCE inflation at just 1.2% Over the three months of July-September 2003, core annualized inflation was a mere 0.9%.

During early 2004, everyone forgot deflation and starting crowing about inflation, or perhaps the awful "stagflation". Annual PCE inflation hit 2.3% in 2004:II, and annualized quarterly inflation in the first half of 2004 was over 3.0%.

Those days are long gone. Annualized quarterly inflation plummeted from 3.1% in 2004:II to 1.1% in the third quarter. Core annualized inflation plunged as well, although less dramatically, from 1.7% to 0.7%.

2004:III was profoundly disinflationary, driven by remarkable deflation in durable goods (-3.2%) and barely positive inflation (+0.9%) for nondurable goods. We are now at the lowest level for quarterly core inflation at any time during the Bush administration -- well below even the deflationary scare levels of 2003.

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