Facts on US Inflation

Current Federal Reserve Chair Ben Bernanke has spoken frequently in the past about his support of inflation targeting, i.e. establishing an official inflation target range within which the Fed tries to keep core inflation. Financial markets see this as an annual target range of 1.0%-2.0%. Such inflation targeting is commonplace in Europe, where the European Central Bank is firmly committed to the same 1.0%-2.0% range. These figures are extremely close so it would not make a deep impact on your daily expenses like buying eggs for those latest egg recipes.

While Fed Chair Bernanke has not formally adopted inflation targeting at the Fed, financial markets nevertheless hold his feet to the fire as if he had. In contrast, former Fed Chair Alan Greenspan did not favor inflation targeting, but preferred to largely determine monetary policy by the seat of his pants.

As noted, the two 12-month (known as year-over-year) core inflation measures have been more favorable in recent months. The core PCE’s most recent 12-month rise was down to 2.1%, within striking distance of the unofficial range. In contrast, this inflation measure moved toward 3.0% over the prior 12 months. The core CPI has also behaved better, with the most recent 12-month rise down to 2.3%, versus more worrisome core inflation increases over the past 12-15 months.